13 Jul 2017 13:44 IST

What Wimbledon can teach us about economics

The format of the tournament helps companies fashion efficient compensation structures

Wimbledon-nomics? That’s some heavy top-spin!

Not at all. There are economic and business lessons to be derived in the most unlikely places, including on Centre Court at Wimbledon.

Okay, serve it up.

Indicatively, the format of the tournament, which celebrates its 140th anniversary this year, helps companies fashion efficient compensation structures. It also explains why some countries are able to unleash entrepreneurial forces, but others can’t. In fact, this year’s Wimbledon seeding can also somewhat explain the relative economic decline in the US.

That’s a lot of economics…

Yes, so let’s get the ball rolling. First, the economic theory of workplace compensation. In 1981, economists Edward P Lazear and Sherwin Rosen propounded the ‘tournament theory’, which argued that a compensation mechanism that converts the workplace into a “tournament” (such as Wimbledon), where workers are rewarded for relative performance, is more efficient than conventional pay structures, where workers are paid a piece-rate. Their point: “the large salaries of executives may provide incentives for all individuals in the firm who, with hard labour, may win one of the… top positions.”

How does the theory work?

At Wimbledon, where prize earnings abide by a ‘winner-takes-it-all’ model, players are compensated not for performance in absolute terms, but for relative performance vis-a-vis other players. Typically, the winner of each match is guaranteed to make about twice as much as the loser, and gets a chance to progress further in, and maybe win, the tournament. As economist Tim Hartford notes, turning offices into tournaments similarly provides incentives for a worker to perform better than one’s peers and, ultimately, to occupy that corner office with a view.

The equivalent of the Wimbledon trophy.

Exactly. And Nick Williams, associate professor in enterprise at the University of Leeds, cites Wimbledon, with its clear and transparent rules and norms (including the ‘predominantly white’ dress code) that are not discriminatory, where breach of rules invites punishment, to argue that countries with tax codes and enterprise rules that are not complex and are administered equitably can create an ecosystem where entrepreneurship thrives, unlike countries where rules are opaque and implementation is haphazard.

Sounds intuitive.

Yes. And economics professors Franc Klaassen (Amsterdam School of Economics) and Jan Magnus (University of Tilburg), authors of Analyzing Wimbledon, used tennis stats to devise a model to rein in excessive risk-taking by the financial industry. Based on their analysis of data from Wimbledon and other Grand Slam events, they conclude that players are more careful on points where an error has a bigger negative impact, like losing a game or a set. “This would be an argument to introduce a penalty in the financial industry… to ensure safer choices when their consequences are bigger. This might even help to avoid the next financial crisis.”

But what the deuce have seedings to do with US decline?

At Wimbledon this year, the highest seeded American in the men’s draw is Jack Sock, at 17. The last American to win at Wimbledon was Pete Sampras, in 2000! As New York Governor Eliot Spizer noted a few years ago, citing seedings and winners at the US Open, this serves as a metaphor for the relative economic decline of the US, and the rise of other economic/tennis powers driven by the winds of globalisation.

So the world is a tennis court?

Sort of. Tennis has strikingly proved a laboratory for many economic theories, including labour economics and gender pay disparity. But that’s a story for another day.

(The article first appeared in The Hindu BusinessLine.)

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