Is the Reward System in NASCAR Efficient?

Abstract

This article provides an overview of compensation and reward schemes in professional automobile racing (NASCAR). Data from the 1998 and 1999 racing seasons show that although end-of-season rewards are highly nonlinear, individual races offer rewards that are more linear. Given that the general conditions for a rank order tournament do exist, this may indicate that the reward scheme is inefficient. Several hypotheses are suggested to explain why NASCAR would create such a reward structure. Vital to the investigation is the fact that teams attempt to maximize a profit function more complex than those in other individual sports. In addition, drivers may exhibit excessively aggressive behavior that would be exacerbated by nonlinear compensation, as described by Lazear. Analysis shows that the need to maintain sponsorship exposure, combined with drivers’ willingness to take risks (and the possible catastrophic result of negative outcomes), creates a competitive environment where winner-take-all would be inefficient.

Prize Structure and Performance: Evidence from NASCAR

“…The idea is that the more effort is supplied by drivers, the greater the potential for an accident, which would lead to a caution flag. This concept is closely related to the sabotage incentive posited by von Allmen (2001). If the number of caution flags is correlated with the unobservable error term, then the OLS estimator used here is neither unbiased nor consistent.…”

“…von Allmen (2001) posited that other alternative models could be applied to NASCAR race outcomes, documenting a number of features of NASCAR races that differ from other sporting events. NASCAR drivers compete for three types of awards in each race: cash winnings based on rank order of finish in the race, points that accrue over the course of the season and count toward a season-long competition with a sizable monetary reward to the driver who accumulates the most points over the course of the season, and other bonus payments for in-race accomplishments like the number of laps lead or winning the pole position in the race.…”

“…In 2007, the winner of the season-long points competition, Jimmie Johnson, won $7.3 million for finishing first in the points competition (he also won $7.6 million in individual races), the second-place finisher in the points competition won $3.2 million and the third place finisher $2.3 million. von Allmen (2001) pointed out that these factors, and the presence of large sponsorship revenues derived from placing logos on cars that depend on the visibility of the car during the race and not on the rank order finish in each race, flatten the overall reward structure over the course of a NASCAR season, reducing the incentive for drivers to provide additional effort in specific races and also reducing the applicability of standard tournament theory to NASCAR outcomes.…”

“…von Allmen (2001) laid out one key theoretical issue associated with the reward structure in NASCAR, noting that the presence of large revenues generated by advertising, the season long NASCAR points competition generating monetary incentives that extend beyond single races, some NASCAR drivers earning significant sponsor bonuses without winning races, and also sharing race winnings with their team, and the relatively compressed nature of race winnings in NASCAR suggest that standard contest theory might not apply.…”

Heterogeneous Ability and Risk Taking in a Rank-Order Tournament

“…A number of studies have examined the specific nature of NASCAR’s rank-order tournament system. An influential article by von Allmen (2001) presented a theoretical argument for why a nonlinear reward structure for monetary payouts from races and championship points would be inefficient in NASCAR. 6 His sponsorship hypothesis suggested that drivers already had a strong incentive to favor a risk-averse strategy because drivers would not risk getting involved in an accident for a small amount of additional prize money if sponsors had a strong dislike for accidents and poor finishes.…”