Dynamic Incentives in the Sport of Kings

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Conference Contributions - Published
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University of Canterbury. Department of Economics and Finance
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Date
2006
Authors
Boyle, G.
Guthrie, G.
Gorton, L.
Abstract

Can the reputational incentives that arise in a dynamic setting mitigate standard agency problems, as Fama (1980) suggests? We examine this issue using data from the horse racing industry, where trainers have an incentive to devote more effort to horses they own themselves, but in doing so run the risk that horses owned by clients will be transferred to other stables in the future. We find that client-owned horses perform significantly better than trainer-owned horses on average, suggesting that reputational incentives are strong. Moreover, the magnitude of this performance premium increases with the potential importance of trainer reputation. These results suggest that reputational incentives can play a powerful role in disciplining behaviour.

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Citation
Boyle, G., Guthrie, G., Gorton, L. (2006) Dynamic Incentives in the Sport of Kings. Auckland: AsianFA/FMA Annual Conference, June 2006.
Keywords
agency, incentives, reputation, horse racing
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