In Praise of Big Prizes

An honors course of 150 students at the University of Texas requires short written assignments each week.  The instructor had given prizes of $,1500, $1,000 and $500 to the top three papers at semester’s end. He abandoned this prize structure and now gives prizes of $100 to the three best papers each week.

The instructor, an English professor, is unfamiliar with tournament models and the idea that larger top prizes and a steeper prize gradient will elicit more effort than a flatter gradient, one with more prizes of smaller amounts (Lazear and Rosen, 1981).  My guess is that he wants to be fair rather than confer such unequal prizes; but he would get better written work if he went back to the old system, just as Tiger Woods is better motivated by a big winning prize for a whole tournament than he would be by small prizes for having the best score in a particular round. Alternatively, combine equity and efficiency by offering two $100 prizes each week, then one $1,000 prize at the semester’s end.

(HT: L.C.)

A Unified Theory of Why Women Earn Less

When it comes to the year 1991, history books will undoubtedly focus on the first Gulf War and the dissolution of the Soviet Union, but at least domestically, the biggest change was one you probably never heard about: 1991 was the first year that women overtook men in college attainment, a trend that has only gained steam since. Today 37.2% of women between the ages of 25 to 29 have a four-year college degree or higher versus just 29.8% for men.

Yet for all the academic achievement by women, men still earn a higher wage for equivalent jobs and continue to dominate the highest ranks of society. Senior management positions? Only one in five are held by women. Fortune 500 CEOs? Just 4% and fewer than 17% of the seats in Congress are held by women. 

Scholars have long theorized about the reasons why women haven’t made faster progress in breaking through the glass ceiling. Personally, we think that much of it boils down to this: men and women have different preferences for competitiveness, and at least part of the wage gaps we see are a result of men and women responding differently to incentives.

What Can a Ball and a Bucket Teach Us About Why Women Earn Less Than Men?

John List and Uri Gneezy have appeared on our blog many times. Now they have written a book, The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life. (The title, by the way, was crowdsourced on this blog). Below is the first in a series of guest posts adapted from the book; Gneezy spoke about this research in our podcast "Women Are Not Men."

What can a Ball and Bucket Teach Us About Why Women Earn Less than Men?
By Uri Gneezy and John List

The sign on the road leading to the city of Shilong in the Khasi hills of northeast India had a puzzling message: “Equitable distribution of self-acquired property rights.” Later we’d find out that the sign was part of a nascent men’s movement, as the men in the Khasi society were not allowed to own property. We’d traveled across the world in search of such a parallel universe—one where men felt like “breeding bulls and babysitters”—because evidence in the U.S. was starting to point to a massive gap in preferences towards competition between the genders and we wanted to understand the reason why.

Our plan was to take a simple game to a matrilineal society (the Khasi) and patrilineal society (the Masai in Tanzania) and give participants just one choice: Earn a small certain payment for their performance in the game or earn a much bigger payment for their performance, but only if they also bested a randomly chosen competitor. The game we settled on? Tossing tennis balls into a bucket 3 meters away.  The experiment was conducted with Kenneth Leonard as a coauthor.

Competition in the Bathroom

For many years, a common graffito in men’s rooms was: “Wash hands, place hands under blow dryer, dry hands on pants.”  The old-fashioned low-powered dryers didn’t have enough power to dry hands well in any reasonable amount of time.  No more: about 10 years ago the Dyson Airblade was marketed, and it was revolutionary:  10 or 15 seconds and one’s hands really were dry.

I assume that they were expensive, which is why I only saw them in a few places, even in the U.K., where they originated. Today they are much more widespread.  They aren’t cheap (I see a discounted price of £615), but I bet they have come down in price.  Why?  The answer is competition: other companies are now making equally effective products, both in the U.S. and the U.K. An innovating entrepreneur may enjoy a monopoly for a while, but competitors with similar products will enter the market, forcing prices down (and increasing consumer surplus for now dry-handed users like me!).

Seattle Is Frustrated By the NBA’s Command Economy

For 41 years, the city of Seattle enjoyed NBA basketball.  And then the Sonics moved to Oklahoma City and became the Thunder.

Across the past year, though, there was hope that the NBA was returning to the Emerald City.  Sure the team was the Kings, a team that has lost at least 65 percent of their regular season games in each of the past five seasons. But if the Kings came to Seattle, other NBA teams would have to come as well (hey, the Kings-SuperSonics have to play someone).  And since the prospective owners (a group led by Chris Hansen) of the “Seattle Kings-Supersonics” offered a purchase price equivalent to an enterprise value of $625 million – more than anyone else (and more than anyone has ever offered for an NBA team) – it seemed likely that in a market economy (where the highest bidder tends to get the product) that the NBA was coming back to Seattle.

Unfortunately, Seattle learned this past week that the NBA doesn’t quite follow the rules of a market economy.  For Seattle to get the Kings, the other 29 owners had to approve the deal.  And when the dust settled, a majority of those owners thought an inferior bid from another group that wanted to keep the team in Sacramento was preferred.  Consequently, Seattle has been frustrated again.

The X-Prize Comes to the Nursing Home

We once put out a podcast called "Reading, Rockets, and 'Rithmetic," about how competition and prizes help drive innovation. Among the examples were the federal education program Race to the Top; Google's "20 percent time" policy; and the X-Prize Foundation, whose founder and chairman, Peter Diamandis, remains one of my favorite radio guests ever, full of vigor and wisdom and optimism. (We'll soon be featuring a Q&A on this blog with Diamandis and Steven Kotler, coauthors of the new book Abundance: The Future Is Better Than You Think.)

I'm happy to report that I am hardly the only person to be inspired by Diamandis. We recently got the following e-mail from David Sedgwick, an executive with a nursing-home company called the Ensign Group.

Would Paying College Players Really Destroy Competitive Balance?

March Madness is in the air. Over the next few weeks the nation will be focused on the fortunes of 68 college teams.  And all this focus on a supposedly amateur sport generates tremendous amounts of money.  For example, in 2010 CBS and Turner Broadcasting agree to pay the NCAA $10.8 billion to broadcast these games for fourteen seasons. This money represents more than 90% of the NCAA’s revenues.

Since colleges and universities tend to be non-profit, who gets all this money?  One person who seems to benefit is John Calipari, head basketball coach at the University of Kentucky.  Last summer, Kentucky extended Calipari’s contract, with a new deal that will pay him $36.5 million across the next eight seasons. Contracts like this – which seem comparable to what an NBA coach might command -- are somewhat surprising. As economist Andrew Zimbalist has observed, the revenues of college sports – although apparently immense – pale in comparison to what we see in professional sports. And that leads one to wonder how a coach in college can command such a salary.

The Rise of the Prize

This is a guest post by Vijay V. Vaitheeswaran, who is the China Business Editor of The Economist and author of the just-published book Need, Speed, and Greed: How the New Rules of Innovation Can Transform Businesses, Propel Nations to Greatness, and Tame the World's Most Wicked Problems.

The Rise of the Prize
By Vijay V. Vaitheeswaran

Could the incentive prize be the most powerful and yet most underutilized tool we have to tame the wicked problems of the twenty-first century?

Prizes in themselves are nothing new, of course. The Longitude Prize — a purse of up to £20,000 — was offered by the British Parliament in 1714 for the discovery of a practical means for ships to determine their longitude. This was an enormous problem on the high seas, as the inability to work out longitude on the sailboats of the age often led to costly and deadly errors in navigation. The greatest minds of the British scientific academy wrestled with this problem, but could not crack it.

Catholic Losses Are Baptist Gains

In the zero-sum game of competitive markets, one company's misstep is often a rival's gain. But what about in the marketplace of religion?

A new study (PDF here) titled “Substitution and Stigma: Evidence on Religious Competition from the Catholic Sex-Abuse Scandal," by Notre Dame economist Daniel Hungerman, looks at whether other religious faiths gained from the Catholic Church sex abuse scandal. Using data from 1990-2007, Hungerman finds significant spillover effects on other religious groups.

The big winner? Baptist churches, both financially and in membership growth.

Call It a Comeback: Why Performance Increases When We're Losing

If you were a New York Knicks fan in the mid 1990's, you surely remember a certain 1995 playoff game in which Reggie Miller scored 8 points in under 9 seconds (two back-to-back three pointers, and two foul shots) to rally the Indiana Pacers to a last-second win over the stunned Knicks. It was a truly sad moment for New Yorkers, made all the worse when the Knicks lost the series in seven games. For whatever reason, some players seem to play better from behind. Reggie Miller certainly did.

A recent study by Jonah Berger of Wharton and Devin Pope of the University of Chicago highlights how being slightly behind is often an advantage. The authors devote a large part of their research to studying 18,000 NBA and 45,000 college basketball games. They also conducted an experiment in which people played competitive games and were given feedback halfway through.