Creating the Hot Hand Effect with a Grand Prize

Abstract

My dissertation is titled 'Creating the Hot Hand Effect with a Grand Prize.' It develops a theory of how the addition of a grand prize for performance in a sequence of tournaments affects agents' effort and participation decisions. The theory's predictions are empirically tested with data from the Professional Golfers' Association (PGA) Tour.

The theoretical model examines choices made by two identical players who compete in two different three tournament 'seasons.' The first type of season provides a prize to the winner of each tournament, while the second type provides an additional grand prize to the overall winner. The model yields three testable hypotheses. First, the effort exerted by each player and the likelihood of participating in a tournament are constant across each tournament in the season without a grand prize. Second, effort and the likelihood of participation is larger throughout much of a season with a grand prize relative to a season without a grand prize because both the payoff to winning and the opportunity cost of not participating in a tournament increase with the addition of a grand prize. Finally, the key finding of the model is that the introduction of a grand prize by the principal induces a 'hot hand effect.' Specifically, the incentives that players face diverge in the middle of the season because the player who has early success (was lucky) in the first tournament of the season has a larger payoff to winning the second tournament of the season because only he can win the grand prize early and avoid the late season effort costs that are associated with winning the grand prize. So, the winner of the first tournament is more likely to also win the second tournament even though both players are equally skilled.

These theoretical predictions regarding performance and participation are tested with data from the Professional Golfers' Association (PGA) Tour. An invitation to the season-ending Tour Championship event, created in 1987, acts as the PGA Tour's 'grand prize.' Golfer performance and participation is generally consistent with the theoretical predictions in seasons with (after 1987) and without (before 1987) the Tour Championship.