Common Tragedies

Thoughts on Environmental Economics

Steak Knives, Tiger Woods and Prizes

Posted by Rich Sweeney on January 27, 2008

Today on Slate, Glengarry Glen Ross, who famously said, “As you all know, first prize is a Cadillac Eldorado. … Second prize is a set of steak knives. Third prize is you’re fired.” Jack Welch wisdom tells us that such schemes are effective because they provide incentives to perform. However, Brown’s research highlights the somewhat obvious fact that what matters to participants in any competition is not just the size of the prize, but the the expected value of the prize, adjusted for the probability of winning. Using data from the PGA, Brown found that mid to lower range players played demonstrably worse when Tiger Woods was in the field. Depending on your goals as a social planner/ competition organizer, Brown’s paper suggests that GE style incentives schemes may actually undermine rather than encourage performance. One the one hand, PGA’s multi-million dollar prizes appear to be working. Tiger Woods is the best golfer ever. But if you’re concerned about average or median player performance, such a prize scheme may actually not be such a good idea when there is a wide, discernible heterogeneity in skill level/ competence.

Ok I know that didn’t really have much at all to do with the type of prize we typically talk about on CT, but I thought it was an interesting paper nonetheless.

3 Responses to “Steak Knives, Tiger Woods and Prizes”

  1. You might consider these kinds of results encouraging for the “X prize” approach to developing solutions to environmental problems.

    You don’t want to encourage a lot of below-average-talent researchers to waste their resources in hopeless competitions, so offer one very big prize rather than many small subsidies.

    (The below-average, low-opportunity-cost researchers may consider the small subsidies enough of a prize and the prospect of their actually solving to problem to be sufficiently remote that the rational thing for them to do is not put effort into real research.)

  2. Tmoney said

    One thing that I’m still waiting for an answer on is how she knows that Tiger’s decision to participate in a tournament is exogenous. Without that, you could just as easily say that Tiger doesn’t participate in those tournaments because he expects that he won’t hit as well as he does in the ones that he does participate in.

    The idea, in general, makes a lot of sense though. I’m pretty sure she as actually uncovered something real, but unless I am missing something obvious in her paper, she doesn’t know that Tiger’s decision not to play is uncorrelated with the things that effect other people’s performance.

  3. Tmoney said

    Mike, I completely disagree, though I am glad you brought this up.

    Prizes/tournaments are generally thought to be best for the problems that require “shoot for the stars” entrepreneurs. If you structure the tournament so that the first swinner take all competition, you leave little incentive for anyone to back any entrepreneur that isn’t the ex ante favorite. Since talent is something that people estimate ex ante, but which is revealed ex post, by excluding the “below average talent” there is a good chance that you could be getting rid of high quality talent disguised by an innovative idea that by its wild and crazy nature looks low quality.

    If you believe that problems related to environmental protection and energy are best solved by these shoot for the stars tournaments, then I think you wouldn’t want a winner takes all tournament. You certainly don’t want to reward failure, but for 2 or more competitors to come to a winning solution, only separated by a nominal amount of time, I think it makes sense for the prize purse to be split. The first place winner obviously deserves more, but its necessary to keep something in the pot for the second place guy so that he continues to try and potentially come up with a different solution. This probably generalizes to more than one winner, and across more than just the time dimension (i.e., various winners at various times with varying degrees of quality/completeness).

    Now, if you think that environmental and energy problems are probably best served by incremental changes, then the prize system isn’t necessary. If the market isn’t already rewarding an incremental change that you deem socially worth-while, just subsidize the difference between the market’s value and yours.

    One thing to take away from the Tiger paper is that it would be nearly impossible to argue that Tiger has dissuaded people from playing golf, professional or otherwise. Even if it does turn out that his presence in a tournament lowers the relative level of play amongst his competitors, Tiger Woods has inspired a generation of golf fans and players, probably much larger than any one in the past, and this new fan/player cohort will have a lasting positive effect on the game.

    The same can be said for superstars in technology tournaments. If it is indeed the case that a superstar lowers the effort level of other competitors, I’d be surprised if it were the case that the existence of the superstar didn’t inspire a new/better/bigger generation of entrepreneurs.

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