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
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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