I always find bringing sporting examples into the teaching of economics makes for an interesting discussion in class. I’m not the only one. Mahar and Paul (2010) have a neat paper that explains how they use sport to explain concepts from economics and finance. For me, and for these authors, sport generates interest in lots of economic topics such as the use of incentives and the importance of costs. At times students have a deep knowledge of sport and they often play or support clubs. This experience they have in an alternative domain can be used as a bridge to understand economic concepts.
A recent example I used was from Fernie and Metcalfe (1999). This one is particularly useful when teaching the concept of moral hazard or the principle agent problem and the paper is a great example of how researchers use data from sport to address the issue of contract design. If my memory serves me right this example has made its way into the microeconomics textbooks.
The researchers analyse pay and performance for jockeys, a role they claim is “replete with moral hazard possibilities”. For those unfamiliar with this term it means post contractual opportunism; you take on an amount of risk while someone else pays the costs if things go wrong. For example, you may be more likely to drive your car dangerously or live a more unhealthy lifestyle if you have car and life insurance respectively. In the case of this paper, jockeys may outsource the risk associated with horse racing if they are paid a fixed amount and leave the owners and trainers carry the financial burden of a poor performance. Not taking on much risk in a race allows jockeys return to the paddock safely, of course with less prize money for owners and trainers. Something that is not in their interests.
Not discounting the importance of jockey safety, I think this is a good example of a principal-agent problem in sport, particularly if you are from Ireland where some of the smaller racetracks are notoriously risky for jockeys. Coming down the hill at my local track in Tramore often requires jockeys to have nerves of steel and take on an awful lot more risks.
The Fernie and Metcalfe study accessed a dataset of individual jockeys in Britain for over 8 years. Jockeys were interesting to survey as they provided a measure of pure individual performance over time – these are rare in organisations where employee productivity can be hard to measure. The study finds that the predictions of agency theory hold true in the racing industry.
Another great example of data accessed from sport to test an economic theory.