The Oscars as a Rank-Order Tournament
Things we can learn from personnel economics regarding the awards season.
This Sunday/Monday (depending on your time zone) we will find out the winners of the 2024 Academy Awards. Awards season provides us with an opportunity to ponder the relevance of the theory of tournaments. Tournament theory can be traced back to a seminal paper written by Ed Lazear and Sherwin Rosen. (I had the good fortune of learning about this model as a PhD student straight from (the since sadly deceased) Lazear at the Price Theory Summer Camp at the University of Chicago.) The basic idea is that there is a principal or manager who wishes to provide optimal incentives for her workers, whose behavior is imperfectly monitored. Lazear and Rosenâs basic insight is that one way to provide optimal incentives for worker to exert effort or otherwise make themselves more productive through human capital investments is to set up a tournament with fixed prizes. Say, the winner of the tournament wins the prize, the second may win a second (lower value) prize, and so on. It is important that prizes are fixed, either individual or collective effort has no effect on the prize at any level. At the end of the day, after each worker simultaneously choose their individually optimal skill investments, the principal can enjoy the workersâ products and the workers receive their prizes based on their rank. Such a tournament often leads to socially optimal effort (e.g. if contestants are risk-neutral, however, tournaments may dominate other solutions such as piece rates even under risk-aversion); workers' have no incentive to free-ride on each other given that collective effort has no effect on the price, and workers receive their expected marginal product for their effort. While there are winners and losers in the tournament, no effort is âwastedâ as the fruit of the workersâ investments is appropriated by the firm they work for. To put it differently, rank-order tournaments are an example of competition leading to optimal or near-optimal behaviour, an application of the invisible hand theorem of economics.
The Academy Awards are one example of a relatively standard tournament. There are prizes to be earned through effort (making good movies, good acting, etc.), the value of the prizes are fixed and rank-based (you can either be a winner, a nominee, or none of those), and effort is not wasted even if one does not receive any prize given that their movie, their acting etc. is enjoyed by moviegoers all around the world. The somewhat counterintuitive result of tournament theory; i.e. that effort is optimal even though the prizes are allocated according to the rank, without considering the differences in the efforts, seems to hold for the Oscars and other film awards.
But why are awards necessary in this market, instead of having only moviegoers voting with their wallets? My guess, which I elaborate in a new working paper (not yet peer-reviewed!) is that this is because would-be actors and filmmakers are taking part in another quasi-tournament, a pre-tournament, if you will. They can accumulate skills and other human capital in order to become one of the industryâs âsuperstarsâ, i.e. sellers of services that serve a very large portion of the market (even though they may be only a little bit better than other performers), while most of the other sellers earn a really modest, or sometimes even zero income. The economics of superstars is another contribution by Sherwin Rosen to the economic literature. Now, what is true for a standard rank-order tournament a la Lazear and Rosen is not true for the âsuperstar pre-tournamentâ: there, individual investments influence the âprizeâ would-be superstars can enjoy if they become one of the stars. But because there are lots of people wishing to achieve stardom, there is often only a small chance of becoming a superstar. This means that oneâs investments can be âwastedâ, and this, in turn may discourage investments. By conferring very high status on stars, the movie industry can provide a needed extra incentive to strive for becoming one of the stars.
Both in the âpre-tournamentâ as well as the awards-tournaments rank, being better than others, plays a key role. This often leads to misunderstandings. The economist Robert Frank, for instance, has often argued that competition for rank is wasteful and individuals taking part of such contests are participates in an âarms raceâ. Sometimes, that is true or close to being true. For instance, doping in sports do seem like a zero- or even negative-sum game. If everyone dopes, nooneâs relative position improves in equilibrium, while their health deteriorates. However, in superstar markets investments made by âcontestantsâ influence not only relative rank but also the value of the service one provides as a superstar. This is why investments are not necessarily excessive, and can even be inefficiently low without the âextra perksâ such as the high status conferred upon superstars.
When it comes to the Oscars, it seems to me there may be very little (if any) waste given its close resemblance to a standard rank-order tournament; the prizes are fixed, and the movies are âconsumedâ by moviegoers and critics. Show-business might look like a rat-race, but I contend that it is far from being a zero-sum game. Work done by economists such as the late Ed Lazear and Sherwin Rosen, helps us see that.