Academic journal article National Institute Economic Review

Rank-Order Tournaments, Probability of Winning and Investing in Talent: Evidence from Champions' League Qualifying Rules

Academic journal article National Institute Economic Review

Rank-Order Tournaments, Probability of Winning and Investing in Talent: Evidence from Champions' League Qualifying Rules

Article excerpt

We analyse how a change in the probability of winning a tournament affects an agent's effort using the qualification rules for entry into the group and playoff stages of the UEFA Champions' League. Our results suggest that increasing the number of slots that a national league gets in the Champions' League leads to increases in investment in talent ex ante. This effect is largest among the teams that in the previous season just failed to qualify. This suggests that changes in prize structure leads to changes in investment decisions amongst those clubs most affected at the margin. However, we also find that incumbent teams that have already qualified for the Champions' League simultaneously raise their efforts, consistent with the occurrence of an arms race among top European football teams.

Keywords: Champions' League; tournaments; effort; payroll

JEL Classification: Z22

1. Introduction

Rank order tournaments are commonly used in organisations where the ordinal rank of output determines agents' compensation, yet output is only observed ex post and is partly determined by a random component. Notwithstanding the fact that under certain assumptions these tournaments theoretically achieve first-best agents' effort, the effort effects of tournaments are hard to test empirically because it is difficult to observe both a principal's rewards and an agent's effort. A sector where arguably both rewards and effort can be observed is the sports industry. As a result a body of research has developed, specifically using golf, running and tennis, where tournaments have ex ante fixed prize structures. One difficulty with this approach is that there tends to be little variation in prize structure over time within a given tournament. As a result, econometric identification of prize effects on effort is largely driven by either across-tournament variation (Ehrenberg and Bognanno, 1990) or within-tournament variation in the pool of competitors surviving at different levels of the tournament in the presence of paired contests (Sunde, 2009). We add to this literature by using a novel source of time variation in prize structure within a sporting tournament and we examine how this variation in prizes influences agents' ex ante decisions.

Specifically, we use the qualification rules for entry into the group stage of the UEFA Champions' League, which is a multi-national European soccer competition (tournament) for top league clubs across Europe. Entry into the Champions' League can be thought of as a tournament in its own right, delivering access to substantial prize money for teams even in the early stages. We use data from twelve different national leagues to test whether a proxy for team effort responds to a change in the number of slots that are assigned by the Champions' League qualification rules to each league, and thus the probability of winning this entry tournament.

The previous empirical literature on tournaments has emphasised effort responses to prizes and treated selection on ability into tournaments as a confounding factor to be controlled for (Ehrenberg and Bognanno, 1990; Coffey and Maloney, 2010; see Frick and Simmons, 2008 for a survey). Using the qualifying rules of the UEFA Champions' League, we adopt a different approach and specifically examine agents' (clubs') responses to different expected prize spreads by trying to enhance the ability of their workers (teams). In particular, we identify changes in the expected prize spreads via changes in the probability that a team in a given league qualifies to the Champions' League indicated by the number of slots that each league has at any given stage of the competition. We examine the effects of this variation in expected prizes on investment in talent at the beginning of a season. A challenge faced by researchers using dynamic sports settings (e.g. a tennis match, a marathon or a golf tournament) to understand tournaments is that in most dynamic settings, agents' effort in period t will be a function of the agent's relative outcome in t = 1. …

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