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Road Warrior Booty: Prize Structures In Motorcycle Racing

Road Warrior Booty: Prize Structures In Motorcycle Racing. M.T. Maloney & Kristina Terkun Contributions to Economic Analysis & Policy : 2002, vol. 1: No. 1, Article 3. Tournament Literature. Q: Do workers/players respond to prizes and prize structure? A: Seem to

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Road Warrior Booty: Prize Structures In Motorcycle Racing

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  1. Road Warrior Booty: Prize Structures In Motorcycle Racing M.T. Maloney & Kristina TerkunContributions to Economic Analysis & Policy: 2002, vol. 1: No. 1, Article 3.

  2. Tournament Literature • Q: Do workers/players respond to prizes and prize structure? • A: Seem to • Q: Do firms/organizers rationally structure tournaments? • A: ?????

  3. Motorcycle Racing • Offers Empirical Possibilities • Multiple Independent Sponsors • Vary level and structure of prizes • Direct, simultaneous competition for racers • When a racer chooses one sponsor, the prizes paid by sponsors of similar products are foregone

  4. Theory – Lazear & Rosen • Two Identical Risk-neutral Competitors • Two Prizes Paid by Firm/organizer • Competing takes effort • Expected prize depends on purse • Effort determined by prize spread

  5. From players' perspective: Given prize spread, determine optimal level of effort Given optimal effort, is expected payoff enough? Two-fold process From organizer's perspective: Bigger prize spreads generate more effort More effort requires higher purse in compensation

  6. Prior Empirical Work • Bull, Schotter, and Weigelt (1987) • experimental evidence • Ehrenberg and Bognanno (1990) • golf • Knoeber and Thurman (1994) • chickens

  7. Application of Model • Competition among heterogeneous tournament organizers • Different levels of brand name • Tournament sponsorship is advertising • Objective: Enhance b/n value • Winning is best

  8. Differences in Brand Name Value • Higher value of brand name means more value in winning • Firm sets higher prize spread to optimally induce more effort • Firm must pay more to compensate for the extra pain • See Figure 1

  9. Figure 1 • Comes from the three behavior equations in L&R model: • Player/workers choose effort based on spread • Tournament organizer chooses spread based on value of output • Organizer must pay competitive purse

  10. Tournament organizers wish to elicitmaximum effort • Load prize money on the highest finishing places • However, this imposes costs on players • Thus, must increase the purse along with the spread of prizes to be competitive

  11. Purse and Spread • Unrelated outside of competition • Purse does not directly affect behavior of worker/players • evidence from chicken farming • Across non-competing motorcycle sponsors, any relation is possible

  12. Field Tournaments Two Problems: • Prizes paid to overall winners • Definition of prize spread

  13. Overall Winners • Sponsors pay 1st prize to 1st place overall • Nonetheless, some riders will race for lower prizes/purse • If prize spread is lower, less work required • Creates same effect as heterogeneous talent

  14. Payoff to Overall Winner • Does not change the basic prediction of Figure 1 • More b/n value=>higher purse • Higher purse =>higher spread

  15. Measurement of Prize Spread • Ladder of Prizes • Some contentiousness in literature • We measure this characteristic in several different ways • Gini Coefficient • Difference between top prizes

  16. The American Motorcyclist Association • Founded in 1924 • AMA Pro Racing is the largest motorcycle racing sanctioning body in the world • The MBNA Superbike Tour main pro series • Classes: Superbike, 600 Supersport, 750 Supersport, 250 Grand Prix (GP), Formula Xtreme, and Pro Thunder.

  17. Riders are eligible for a track purse and industry bonus awards. • Rider must use the sponsor’s products, display sponsor decals • Many of the industry bonus award sponsors are in direct competition. • Sponsor purses can vary dramatically across sponsors within the same product category.

  18. Table IIndustry Bonus Awards

  19. Table II • Sponsor Purse is the sum of the prizes paid to each place • Class Purse is the sum of the sponsor purses across the entire racing class. • Product Purse is the sum of the sponsor purses within a product group.

  20. Table IIStatistics on Purses

  21. Prize structures • Vary greatly across sponsors • A rider can receive anywhere from $150 to $600 on helmets • Sponsors also vary the number of places that they pay out

  22. Table III: Places Paid

  23. Table IV: Tire Sponsors

  24. Incentive Intensity • Measures of incentives created by the prizes • Spread of Top Prizes • Gini Coefficient

  25. Incentive Intensity forTire Sponsors

  26. Test of the Theory • Ratio of Sponsor's Prize Spread to Rival’s • Should be positively related to ratio of sponsor’s purse to rival’s • From Figure 1:

  27. Specification

  28. Table VISummary Statistics

  29. Table VII Regressions

  30. Estimated Effects • Doubling Sponsor’s to Product Purse • Allows firm to double the prize intensity

  31. Conclusions • Firms that pay lower expected prizes must pay less incentive oriented prizes

  32. Importance of Finding • Tournament theory is based on the premise that workers respond to prize incentives by working harder, and working harder is not free. • This is confirmed by observing that firms recognize this response and anticipate this behavior when making their wage offers.

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