road warrior booty: prize structures in motorcycle racing

Road Warrior Booty: Prize Structures Road Warrior Booty: Prize Structures In Motorcycle RacingIn 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

• Q: Do firms/organizers rationally structure tournaments?

• A: ?????

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

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

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

Prior Empirical Work

• Bull, Schotter, and Weigelt (1987)– experimental evidence

• Ehrenberg and Bognanno (1990)– golf

• Knoeber and Thurman (1994)– chickens

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

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

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

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

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

Field Tournaments

Two Problems:

• Prizes paid to overall winners

• Definition of prize spread

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

Payoff to Overall Winner

• Does not change the basic prediction of Figure 1

• More b/n value=>higher purse

• Higher purse =>higher spread

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

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.

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.

Table IIndustry Bonus Awards

ClassSponsors inEach Class

Bonus Award Totalfor Each Class

Sum of Top 1st

Place MoneySuperbike 17 $34,540 $7,800250 GP 11 9,175 2,100Pro Thunder 10 10,775 3,300Formula Xtreme 19 30,690 2,550600 Supersport 30 88,210 3,800750 Supersport 25 31,315 3,650Total 112 $204,705 $23,200

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.

Table IIStatistics on Purses

Mean StandardDeviation

Minimum Maximum

Sponsor Purse $ 1,832 $ 3,730 $ 225 $ 32,550Product Purse 8,140 10,142 225 50,600 with rivals 11,292 10,734 1,600 50,600Class Purse 43,041 28,713 9,175 88,210

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

Table III: Places Paid

Prizes Sponsors3 295 5110 2520 7

AvonTyres

Michelin DunlopTire Corp.

Place Prizes1 $ 800 $ 500 $ 10002 500 300 5003 350 200 2504 200 100 505 150 50 506 1007 1008 1009 100

10 100

SponsorPurse

$2500 $1150 $1850

Table IV: Tire Sponsors

Incentive Intensity

• Measures of incentives created by the prizes– Spread of Top Prizes– Gini Coefficient

DP P

( )1 3

2

Incentive Intensity forTire Sponsors

Avon Tyres Michelin Dunlop

Sponsor Purse $2500 $1150 $1850

D $225 $150 $375G 0.750 0.620 1.033

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:

ln( ) ln( ) (ln( ), ln( ))S S f A Ba b

Specification

Dependent Variable: Incentive Intensity of PrizesIndependent Variables Predicted SignsSponsor Purse (+)Sponsor Purse in Absence of Rivals (?)Average Purse of Rivals (-)Sum of Average Purses for other Products (?)Average Track Purse for the Racing Class (?)

Table VISummary Statistics

# ofObs.

Mean StandardDeviation

Minimum Maximum

Dependent Variables:

Gini Coefficient (G) 112 .53 .33 .14 2.01

(for sponsors with rivals) 77 .61 .33 .24 2.01Top-Prize Gaps (D) 112 $164 $210 $5 $1500

(for sponsors with rivals) 77 $186 $177 $25 $1000

Independent Variables:

Sponsor Purse 112 $1832 $3730 $225 $32,550(for sponsors with rivals) 77 $2115 $4152 $275 $32,550

Average Purse of Product Rivals in Racing Class

77 $2115 $3328 $500 $22,625

Summed Average Purse of Other Product Sponsors

112 $14,606 $8001 $3508 $25,901

Table VII Regressions

Gini Coefficient Top-Prize Gaps

SpecificationsIndependent Variables (a) (b) (c) (d)

-4.0E-5 -0.47 -5.7E-5 -0.91Average Purse of Product Rivals in Racing Class (-2.58) (-5.33) (-2.32) (-10.70)

0.45 0.53 0.86 0.98Sponsor Purse(9.53) (7.62) (11.45) (14.61)

-0.06 -0.09Sponsor Purse Dummy forAbsence of Rivals (-4.28) (-4.48)

-0.10 -0.03 -0.12 0.04Summed Average Purse ofOther Product Sponsors (-1.54) (-0.36) (-1.22) (0.49)

0.01 -0.01 0.04 -0.01Average Track Purse in RacingClass (0.46) (-0.25) (0.90) (-0.18)

Intercept -2.92 -0.06 -0.19 -0.10(-4.08) (-0.05) (-0.17) (-0.10)

R-squared 0.55 0.47 0.64 0.77

# of Obs. 112 74 112 74

Estimated Effects

• Doubling Sponsor’s to Product Purse

• Allows firm to double the prize intensity

Conclusions

• Firms that pay lower expected prizes must pay less incentive oriented prizes

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.