Common Tragedies

Thoughts on Environmental Economics

Prizes, Furniture, and the Boston Red Sox

Posted by Rich Sweeney on November 1, 2007

Ok so this post has almost nothing to do with environmental economics, but it’s related to prizes (which I’ve talked about here before). Feel free to ignore this if prizes don’t interest you or if you’re a hater (ie Yankees fan).

So I was just up in Boston for the weekend and my aunt was even more excited than I would’ve expected about the Red Sox winning the World Series. Thats because way back in April she took part in a unique promotion offered by Jordan’s Furniture, the best known furniture store in New England. The deal was that Jordan’s customers would receive a full refund on any furniture purchased between March 7 and April 16 (the start of the baseball season) if the Red Sox went on to win the World Series. According to Jordan’s, over 30,000 people took advantage of the offer.

With that type of financial exposure on the line, you’d think that Elliot and Barry (the furniture chain’s self-promoting front men) would be rooting against the Sox. But in reality they were economically indifferent about the outcome of the World Series once it started. That’s because, like many other businesses, they took out insurance on their promotion. Not only did the promotion significantly increase sales at the time, my guess is that the cost of the Sox insurance was passed on to the customers at some point. The result was a true win-win situation.

So what does this have to do with prizes? Unlike pushing through innovation by providing funding at the back end, pulling ideas to fruition using prizes as incentives allows policy makers to fund such endeavors with insurance. Aside from freeing up capital in the short run, insurance offers valuable market generated information about the likelihood of success. Given that we’re most likely going to be dealing with government sponsored prizes, such market mechanisms could prove extremely valuable.

A second, slightly less important benefit of prizes can also be observed in the Jordan’s example. People like contests, and prizes inherently incite interest and excitement in people. Everyone in my family supports the Sox but I’ve certainly never seen my aunt follow a sporting event that intently before. One of the main barriers to tackling climate change is a lack of public understanding and enthusiasm about the issue. If a clever prize can cause this guy to write about furniture, maybe it can inspire the average American to reconsider her energy consumption.

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