progress in economics (cont.)

Doug Henwood dhenwood at panix.com
Tue Apr 30 08:44:35 PDT 2002


"Suspense"

BY: WILLIAM M. CHAN

University of Hong Kong

School of Economics and Finance

PASCAL COURTY

London Business School

Department of Economics

Centre for Economic Policy Research (CEPR)

HAO LI

University of Toronto

Department of Economics

University of Hong Kong

School of Economics and Finance

Document: Available from the SSRN Electronic Paper Collection:

http://papers.ssrn.com/paper.taf?abstract_id=306767

Paper ID: CEPR Discussion Paper No. 3251

Date: March 2002

Contact: WILLIAM M. CHAN

Email: Mailto:wchan at econ.hku.hk

Postal: University of Hong Kong

School of Economics and Finance

Pokfulam Road

Hong Kong, CHINA

Phone: +85 2 2859 2192

Fax: +85 2 2548 1152

Co-Auth: PASCAL COURTY

Email: Mailto:pcourty at lbs.ac.uk

Postal: London Business School

Department of Economics

Sussex Place

Regent's Park

London NW1 4SA, UNITED KINGDOM

Co-Auth: HAO LI

Email: Mailto:lihao at economics.utoronto.ca

Postal: University of Toronto

Department of Economics

150 St. George Street

Toronto, Ontario M5S 3G7 CANADA

Paper Requests:

Contact CEPR Discussion papers, 90-98 Goswell Road, London EC1V

7RR, UK. Phone:(44 20)7878 2900. Fax:(44 20) 7878 2999.

Mailto:orders at cepr.org Fee: 5 (British Pound Sterling) /US $5 /8

euros per paper. Payment in advance is requested. Postage and

packing additional.

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: Tournament, sports economics, incentives



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