Contest Theory Essay

According to Dietl, Franck, Grossmann, & Lang (2009), “professional team sports is an interesting source of natural experiments” for contest theory due to its many different organizational structures and setups across the world. Some sports enjoy the luxury of having extensive databases, making them one of the most empirically tested areas in contest theory. Within sports economics, researchers often focus on risk taking and/or effort. The most prominent empirical tests in the case of effort revolve around incentives and heterogeneity. Researcher focusing on risk often additionally test the impact of gender and the number of competitors. The following section will review empirical literature within sports economics before turning to the empirical

One of the first empirical studies related to contest theory with data from sports was conducted by Ehrenberg & Bognanno (1990a). Their ultimate goal was to find out whether tournament structures, indeed, have incentive effects. They use data from professional U.S. golf tournaments to analyze the effect of prize level and structure on effort provision. In line with theory, they find an increase in prize results in increased performance. Ehrenberg & Bognanno attribute this to increased effort provision. They clearly show that the impact on effort increases in significance with an increasing prize spread. Such a prize structure is characteristic for sports tournaments and often highly pronounced towards the end. In a second paper, Ehrenberg & Bognanno (1990b) analyze similar data from the European PGA tour and show that most of their previous findings are robust. In their studies, Sunde (2009) and Lallemand, Plasman, & Rycx (2008) found similar effects, not only showing a positive relation between prize and effort, but also increasing effort with the prize spread. Davies & Stoian (2014) could confirm those effects for road running and find it to be strongest for high ability athletes. Additionally, they show a positive relationship between the number of high ability participants and

To test these theories, Malueg & Yahes (2010) determine homogeneous tennis matches with the help of betting odds. This allows them to test the incentive effects of a best-of-three symmetric contest. Though only analyzing performance rather than effort, they find supporting evidence for economic theory as follows: With homogeneous agents, incentives are equal in the first round and both players have equal winning probabilities. In the second round, the leader (i.e. the winner of the first round), has incentives to exert more effort. Even though the players are homogeneous, the winner of the first round is more likely to win the second round as well. Should the contest, despite everything, go in a third round, the incentive structure is comparable to the first round, making it equally likely for the players to win. In theory, it is often argued that incentive effects only completely unfold in symmetric rank-order tournaments. Franke (2012) tests whether a homogeneous playing field indeed provides higher incentives compared to a heterogeneous field. Data from amateur golf allows to compare performance in a symmetric contest to performance in an asymmetric contest. Confirming the hypothesis, Franke finds that an individual players’ performance significantly increases when playing in a levelled contest compared to a heterogeneous contest. Today, competitive balance is of impeccable interest in