Road Warrior Booty: Prize Structures in Motorcycle Racing

Michael T. Maloney, Clemson University
Kristina Terkun, Clemson University

Abstract

This research reports the results of an analysis of prize structures among competing firms paying tournament wages. In motorcycle racing, sponsors compete in an auction for riders using tournament prizes as bids. Since racers can only ride one bike and wear one helmet, they are forced to choose among sponsors of similar products. We find that in the face of competition, sponsors are forced to lower the incentive intensity of their prize differentials as rival sponsors post larger purses. Our test offers new corroboration of the Lazear-Rosen tournament model. Other researchers have found that workers respond to bigger prize differentials by working harder. We find that firms recognize this and also recognize that in the competitive labor-market equilibrium this extra work must be compensated by offering higher expected wages through bigger purses. Our results complete the theoretical circle: workers respond to the incentive effects of tournament wages and firms anticipate this behavior when making tournament wage offers.