Working Paper: CEPR ID: DP3251
Authors: William M. Chan; Pascal Courty; Hao Li
Abstract: In a dynamic model of sports competition, we show that when spectators care only about the level of effort exerted by contestants, rewarding schemes that depend linearly on the final score difference provide more efficient incentives for efforts than schemes based only on who wins and loses. This result is puzzling because rank order schemes are the dominant forms of reward in sports competitions. The puzzle can be explained if one takes into account the fact that spectators also care about the suspense in the game. We define the spectators' demand for suspense as a greater utility derived from contestants' efforts when the game is closer. As the demand for suspense increases, so does the advantage of rank order schemes relative to linear score difference schemes. This relative advantage is realized by suitably increasing the winners prize in rank order schemes. When the demand for suspense is sufficiently high, the optimal rank order scheme dominates all linear score difference schemes, and in a limit case, it is optimal among all incentive schemes that reward contestants on the basis of the final score difference.
Keywords: incentives; sports economics; tournament
JEL Codes: D80; J33; L83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Spectators' demand for suspense (D84) | Effectiveness of incentive schemes (J33) |
| Game closeness (score difference is small) (C73) | Rank order schemes induce greater effort than linear score difference schemes (C92) |
| Spectators' demand for suspense (D84) | Optimal rank order scheme increases stakes for contestants (C78) |
| Low demand for suspense (D84) | Linear score difference schemes may outperform rank order schemes (C69) |