Tournament rewards and heavy tails

• 成果类型: Article
• 署名作者: Drugov, Mikhail; Ryvkin, Dmitry
• 署名单位: New Economic School; Centre for Economic Policy Research - UK; State University System of Florida; Florida State University
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2020.105116
• 发表日期: 2020
• 关键词: Heavy tails; power law; tournament; Optimal allocation of prizes; failure rate

摘要

Heavy-tailed fluctuations are common in many environments, such as sales of creative and innovative products or the financial sector. We study how the presence of heavy tails in the distribution of shocks affects the optimal allocation of prizes in rank-order tournaments a la Lazear and Rosen (1981). While a winner take-all prize schedule maximizes aggregate effort for light-tailed shocks, prize sharing becomes optimal when shocks acquire heavy tails, increasingly so following a skewness order. Extreme prize sharing-rewarding all ranks but the very last-is optimal when shocks have a decreasing failure rate, such as power laws. Hence, under heavy-tailed uncertainty, typically associated with strong inequality in the distribution of gains, providing incentives and reducing inequality go hand in hand. (C) 2020 Elsevier Inc. All rights reserved.