THE RESPONSE OF WORKERS TO WAGES IN TOURNAMENTS: EVIDENCE FROM FOOT RACES

1. THE RESPONSE OF WORKERS TO WAGES IN TOURNAMENTS:EVIDENCE FROM FOOT RACES Meng Yang 03/20/2014

2. SUMMARY • The paper was written by Michael T. Maloney & Robert E. McCormick. • Department of Economics, Clemson University. • Examine labor supply using 1,426 responses of individual runners to prizes in open invitational foot races. • Use these data to decompose the overall market response of higher prizes into two components. • First, there is an entry effect where higher wages attract more highly skilled runners to participate. • Second, the spread between prizes incites runners individually to work harder. • Examine the supply elasticities between the sexes. • Women respond more to higher wages than men in both the entry and individual effort dimensions. • More concentrated is the prize money in a race, the higher is the revealed effort level by the runners.

3. INTRODUCTION • The purpose of this research is to investigate the response of workers to prizes paid in tournaments- foot racing. • First, is the positive relation between prize level and racing performance an individual or a market response or both? • Second, do men and women respond the same to these wage changes? • The analysis is a test of the tournament model and follows the empirical work and we find that runners respond to financial incentives. • The supply curve of labor is comprised of the sum of two different and unrelated components. • Potential responses by existing participants &by new entrants.   what are the relative magnitudes of these components?

4. BACKGROUND • Isolate the individual component of what is readily observed in many labor market settings to be a positive relation between pay and performance. • Two factors are in determining an individual's revealed response to a pay change. • First, when the market is thin, there are few potential entrants, the gaps between runners' abilities are large implying that inferior runners can rarely pressure superior runners. • Similarly, when the tournament is closed, it is impossible for potential entrants to join the tournament and narrow the gaps between runners.

5. PRIOR RESEARCH • Market or entry effect is more pronounced than the individual effect. • No evidence that uncompensated wage elasticities differ for full-time versus part-time working wives. • Rivals will only participate in the competition if the expected prize is large enough to offset the expected cost of the anticipated effort. • The decision-making process is two-fold. • The bigger the prize spread, the more effort each player will be forced to exert in order to maximize the expected payoff. • The player makes a determination of whether the expected prize, is large enough to compensate the work involved. • In professional golf, prize differentials between finishing positions increase proportionately with the purse.

6. GENDER DIFFERENCES IN LABOR SUPPLY • For women, The labor force participation rate is lower than for men. • For a given change in the market wage, the response by females is more elastic than the response by males.

7. THE DATA AND EMPIRICAL RESULTS • Four age-sex groups: open men, open women, men masters, and women masters. • The total purse paid varies from a low of $25 for a race paying only first place for the men's and women's masters class to $23,900 for the race paying the top twelve open male finishers. • There are 510 open men finishers, 474 open women, 227 men masters, and 215 women masters in the sample, a total of 1,426.

8. THE DATA AND EMPIRICAL RESULTS

9. THE DATA AND EMPIRICAL RESULTS • Players choose to enter a tournament based on the expected prize they will win, but once in the race, they exert effort based on the difference between prizes that they face. • First, we include the average prize paid in the tournament. • The higher the average prize, the better the racers who will choose to participate. • Second, we include the difference between the prize won by each racer and the next lowest prize. We call this Prize Spread. • The larger is this difference the more individuals will exert themselves. • The coefficient estimate on prize spread is contaminated with the participation effect that is supposed to be isolated in the average prize variable.

10. The model has good fit based on R2 • Women in the open field are slower than men masters. • Overall times are slower when the finish of the race is not close • The coefficient on the variable ClosenessFactor has a positive sign • The less concentrated the payout of the purse, the slower is the field • Both the average prize paid in a runner's class and the prize spread are negative and statistically significant at the .01 level • The coefficient on average prize is -.017 • The coefficient on the prize spread is -.039

11. There is an individual response as well as a participation effect. • Faster men in the open class are least attracted, while women masters are the most attracted. • The participation effect is larger for women than men, and larger for old than young.

12. THE INDIVIDUAL ELASTICITY OF SUPPLY • The pooled estimate of the prize-spread coefficient is -.015. This estimate is statistically significant at the .01 level. • Now the average prize, or participation effect, is larger than the individual effect. • The open class is more responsive than masters, that is, young people respond more individually than older people. • The results also say that men are more responsive individually than women.

13. POSSIBLE BIAS IN THE INDIVIDUAL EFFECT • The potential for a sample selection bias that could affect our estimate. • If this is true we would be falsely attributing the performance response to pay when thefact it is a stochastic result of our sampling technique. • The data show that the number of places deep in a race that receive prizes goes up with the size of the first place prize money. • Our conclusion is that random variance in individual performances is not driving the magnitude or significance of the individual elasticities.

14. OTHER RESULTS • There is less potential for a wage rate response in a short race than a long one. • The size of the field is an important determinant of the elasticity of supply. • The interceptshift for each race is negatively correlated to the purse paid in that race and to the number ofplaces paid, as is Closeness.

15. IMPLICATIONS OF THE ANALYSIS • Corporate takeovers may do is turn an intramural game into an open tournament. We find that existing workers supply additional effort when wages increase in an open tournament. • Corporate takeovers have large effects on managerial performance. • Firms that use wages as a coordination and control device should recognize that the threat of turnover is useful when wages are raised. • We do not find any significant differences between the individual responses of men and women or old and young people. • We find a difference between the market's response by age and sex categories.

16. CONCLUSIONS • There are two separate responses of runners to wages. • First, higher prizes are associated with faster times for individuals already in the race. • Second, higher prizes attract a faster field.   • Women have a higher participation effect than men • Men have a larger individual response to higher prize spreads. • Younger people are more responsive individually • Old people have bigger participation effect. • The more concentrated the prize money, the higher is the revealed effort level. • Markets and individuals respond to price when competition is free and open.