DP3251 Suspense

Author(s): William M Chan , Pascal Courty , Hao Li

Publication Date: March 2002

Keyword(s): tournament , sports economics , incentives

JEL(s): D80 , J33 , L83

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP3251.asp

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.