Skewing the Odds: Taking Risks for Rank-Based Rewards

70 Pages Posted: 15 Mar 2016 Last revised: 7 May 2016

See all articles by Dawei Fang

Dawei Fang

Göteborg University - Center For Finance; Göteborg University - Department of Economics

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Date Written: May 4, 2016

Abstract

In competitions for rank-based rewards, how does the structure of rewards affect risk-taking? We answer this question in a framework where, subject only to a mean-performance constraint, contestants compete for rank-based "prizes" by choosing random performance levels. We derive the unique equilibrium of this game and provide a comprehensive analysis of the relation between the equilibrium performance distribution -- including modality, symmetry, tail behavior, dispersion, and skewness -- and the contest structure. Increasing the real gain inequality of prizes, adding contestants, or scaling up contest size increases performance dispersion but not necessarily skewness while convexifying the prize schedule increases both dispersion and skewness.

The supplement to this paper: http://ssrn.com/abstract=2747503

Keywords: contests, risk taking, dispersion, skewness, prize inequality

JEL Classification: C72, D81, G11

Suggested Citation

Fang, Dawei and Noe, Thomas H., Skewing the Odds: Taking Risks for Rank-Based Rewards (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2747496 or http://dx.doi.org/10.2139/ssrn.2747496

Dawei Fang (Contact Author)

Göteborg University - Center For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Göteborg University - Department of Economics ( email )

Sweden

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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