dec03_Article 2 12/4/03 11:17 AM Page 1137 Journal of Economic Literature Vol. XLI (December 2003) pp. 1137–1187 The Economic Design of Sporting Contests STEFAN SZYMANSKI1 1. Introduction television viewing of sports events is esti- mated to be 77 billion hours per year.2 One hat is the optimal number of entrants might add to this several hundreds of mil- in a race, or the optimal number of W lions of hours spent in discussion at the teams in a baseball league? What is the opti- water cooler. Designing an optimal contest is mal structure of prizes for a golf tournament, both a matter of significant financial concern or degree of revenue sharing for a football for the organizers, participating individuals, championship? How evenly balanced should and teams, and a matter of consuming per- the competing teams be in the NASCAR or sonal interest for millions of fans. Not sur- Formula One championships? What is the prisingly, many lawyers and politicians maximum number of entrants per nation to express close interest in the way that sport- the Olympic Games that should be permit- ing contests are run. ted? What quota of qualifying teams to the Economists have something to offer as soccer World Cup should be allocated to the well. The design of a sporting contest bears developing nations? a close relationship to the design of an auc- These are all examples of design issues in tion. In both cases, the objective of the sports. Sporting contests are one of the most organizer is to elicit a contribution (a bid, an significant branches of the entertainment investment, or some effort) from contestants industry, measured by the amount of time who may as a result win a prize. The anal- that consumers devote to following them. ogy between an auction and a contest/tour- According to the U.S. Census Bureau, annu- nament3 is already well known (see e.g. Arye al attendance at spectator sports in 1997 Hillman and John Riley 1979). Given the totaled 110 million (equivalent to 41 percent objective function of the organizer and the of the population), while annual household 2 Kagan Media estimates that sports accounts for 25 1 The Business School, Imperial College, London. I am percent of all TV viewing, while Nielsen Media Research grateful to Jeff Borland, Braham Dabscheck, David estimates the average U.S. household views 2738 hours of Forrest, Bernd Frick, Philippe Gagnepain, Brad TV per year (7.5 hours per day). This significance to con- Humphreys, Erik Lehmann, Stefan Késenne, Gerd sumers is not reflected in dollar spending. The Census Muehlheusser, Steve Ross, Rob Simmons, Peter Sloane, Bureau reported in 1997 that spectator sports generate a Paul Staudohar, Tommaso Valletti, Andy Zimbalist, the direct income of only $14 billion domestically (0.17 per- editor, and two anonymous referees for valuable com- cent of GDP). The annual value of U.S. major league ments. I also thank seminar participants at the ESRC study sports broadcast rights is in the region of $4 billion group on the Economics of Sport, Arts and Leisure, the (Soonhwan Lee and Hyosung Chun 2001). Stockholm School of Economics, and Glasgow University 3 The words “contest” and “tournament” are used inter- for their observations. Errors are of course my own. changeably throughout. 1137 dec03_Article 2 12/4/03 11:17 AM Page 1138 1138 Journal of Economic Literature, Vol. XLI (December 2003) technology of the auction/contest it is possi- directions in which the literature may de- ble to design an optimal prize scheme con- velop. A unifying theme of the paper is that tingent on the distribution of contestant the empirical literature can do much to shed abilities/willingness to pay. While there have light on the issues raised by the theoretical been a number of reviews of the economics literature.5 of sports in recent years (e.g. John Cairns, The classification of sports is a subject Nicholas Jennett, and Peter Sloane 1986; that has exercised the minds of sociologists Rodney Fort and James Quirk 1995; and economists alike. One distinction that Lawrence Kahn 2000; John Vrooman can be made is between modern sports that 2000),4 none of these has attempted to have been formalized, quantified, and regu- explore systematically the design of sporting larized on the one hand, and traditional contests. sports that are often informal and only The contest design approach may seem an semi-structured on the other hand. unusual way of thinking to those who use Examples of the latter might include baseball or soccer as their sporting para- medieval football in Europe or the Aztec digm. In these and other team sports we are Ball Game (see Allen Guttman 1998 for accustomed to thinking of teams as inde- further examples). This paper deals prima- pendent entities that come together to agree rily with the commercialized modern on rules of the competition. In their review sports, almost all of which were formalized for this journal, Fort and Quirk (1995) state, somewhere between 1840 and 1900—e.g., “Professional team sports leagues are classic, baseball (1846), soccer (1848), Australian even textbook, examples of business cartels.” football (1859), boxing (1865), cycling Members of a sports league certainly have (1867), rugby union (1871), tennis (1874), common interests and may benefit from a American football (1874), ice hockey reduction of economic rivalry between the (1875), basketball (1891), rugby league teams. Many sporting contests are centrally (1895), motor sport (1895), and the coordinated, however, with little or no input Olympics (1896).6 from the teams or individual contestants; Historians (see, e.g., Tony Mason 1980; examples include the Olympic Games, the Wray Vamplew 1988) have argued that the soccer World Cup, the New York Marathon, process of formalization of sports mimicked and the U.S. Open Golf Championship. the formalization inherent in industrializa- What all these contests have in common is tion and urbanization (time-keeping, rou- the need to provide contestants with the tinization). Indeed, the commercialization of appropriate incentives to participate and sport was initially an urban phenomenon, perform. Joint decision-making through a since industrial towns and cities were capa- cartel is simply one (possibly inefficient) ble of supplying large paying audiences. It is mechanism to achieve this end. probably for this reason that most modern This review attempts to systematize the sports were formalized either in Great contribution of economic thinking to design Britain (the first industrialized nation) or the issues in sports, and to relate this research to the growing empirical literature on sports. This is an enterprise still in its infancy, how- ever, and much remains to be done to under- 5 This paper can thus be distinguished from fields such stand fully the interaction of contest design as “sabermetrics”—the study of baseball statistics for their own sake—which has little to do with empirical testing of and outcomes. The review will suggest new economic theory. 6 All of these dates, associated with early rulebooks, are subject to controversy. By contrast, golf, cricket, and 4 See also Andrew Zimbalist (2001) for a useful collec- horse racing had established rules and clubs from the tion of seminal articles in the sports literature. mid-eighteenth century. dec03_Article 2 12/4/03 11:17 AM Page 1139 Szymanski: Economic Design of Sporting Contests 1139 United States (the most rapidly industrializ- atively simple. Players perform and agree to ing nation of the late nineteenth century).7 abide by the tournament rules in order to In this paper we draw the distinction compete for a prize which is usually meas- between individualistic sports (such as ten- ured in terms of both status and money. nis, golf, and boxing) and team sports, such Players make little long-term commitment to as soccer and baseball.8 The distinction rests the organizers, even if it is an annual event, on the unit of competition and the nature of and select among available competitions to the demand for the contest. In team sports, maximize their own utility. Likewise, the the players act as agents on behalf of the organizers make few commitments to the team—which may be an actual employer athletes, and typically offer places to the best (e.g. a club) or some delegated authority players they can attract. The demand for an (e.g. a national team).9 In individualistic individualistic contest depends to a signifi- sports the player acts as a sole trader; typi- cant degree on the quality of the contestants cally in these sports, the athletes/players participating and the amount of effort they enter competition in order to establish who contribute to winning. Thus an individualis- is the best, because this is what interests the tic sporting contest conforms naturally to the spectators. The relationship between the standard contest model, outlined in the next tournament organizer and the players is rel- section. Section 3 reviews the contribution of the empirical literature to testing the pre- dictive power of contest models. 7 The other great industrial nation of the period, Germany, also developed its own sporting activity during The demand for team sports is more com- this period, the gymnastic “Turnen” movement. This plex. Firstly, while the organizational struc- movement eschewed competition between individuals in ture of individualistic sports is fairly uniform favor of the development of a disciplined athleticism with military purposes in mind, and was ultimately ousted by (for example, there is little difference the Anglo-Saxon sports (see Guttman 1998, ch. 7). between the organization of the New York 8 Like all classifications, this one is at best imperfect. Marathon and the Berlin Marathon, or that For example, the competitors in motor racing are teams of mechanics, but much of the spectator interest focuses on of the U.S.