Skewing the odds: Optimal strategies in capacity-constrained contests

Noe, Thomas and Fang, Dawei (2013) Skewing the odds: Optimal strategies in capacity-constrained contests. Said Business School.

Abstract

We study contests where, subject only to a capacity constraint on mean performance, contestants, facing a rank-dependent payoff function, choose arbitrary performance distributions. In the case of symmetric capacity, we derive closed-form solutions for equilibrium performance distributions and analyze the effect of contest structure on equilibrium behavior. We show that equilibrium performance distributions are never dispersionmaximizing and are always right-skewed when the contest is selective. When contestants’ capacities are private information, contests serve as a selection mechanism. We show, contrary to the ruin-and-risk-taking intuition, that weaker contestants do not always gamble on high-risk strategies and that, when the capacities of weak and strong contestants are sufficiently different, the contest mechanism produces perfect selection efficiency. Finally, we examine the effect of various modifications of the contest mechanism and apply our results to actual contests, such as student examinations and competition between mutual funds for star rankings.

Item Type: Other Working Paper
Keywords: Contest Design, Mutual Fund Tournament, Risk Taking, Selection Efficiency, Skewness, Win-Small-Lose-Big, finance
Subject(s): Finance
Date Deposited: 18 Oct 2013 13:12
Last Modified: 02 Mar 2017 10:43
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/4849

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