Living Economics

Race Day Payoff
Jim Kenney
Because of their scarcity value, prizes often induce wasteful resource expenditures among competitors that collectively may exceed the face value of the prizes.

In the late 1980's, I owned a 1971 Ford LTD with a 450 big block engine. In the summer of 1989 I worked at the Goodyear on Park Avenue. On Friday afternoons one of my co-workers, David, and I would go down to Presidents Island and race our cars. David owned a 1970 Barracuda with a 351 horsepower engine. Since we were both mechanics we received auto parts at cost. We would spend the week working on our cars so we could race other people. Most of the time David and I won when we raced other people.

However, in August we decided to try and start racing each other. The first time David beat me. That night we decided to race the next week for a $100 prize. I won that race and the next five races. Each week we would put another part in our car to make it go faster, costing around $100. After the fifth race David wanted to race for $500. I agreed. I had won the last five races by only a few inches and I knew I really needed an edge, so did David. We both knew that the only thing to give us that edge was to buy special "slick back" racing tires that would cost $675 each pair. I did not have the money for both the tires and the wager. By Wednesday, David had the tires on his car, and I was still wondering what to do. If I bought the tires and won, I would be behind $175. But if I lost, I would be out $1175. Another friend of mine, Brian, told me it was supposed to rain that Friday. This meant that "slick back" tires would perform poorly on wet pavement. So, I took a risk and did not buy the tires and it did end up raining on Friday. David's slick back tires caused him to lose the race. Since I did not buy the tires I was up $500 and David was down $1175.

In retrospect, if we add up all the monetary expenses for both participants, the total would be over $1700 for a prize of only $1000, so from society's perspective this was surely a wasteful rent-seeking activity. Because of its scarcity and vanity appeal, prizes often command value way above its monetary amount. This vanity value can be considered economic rent. In pursuit of this rent, each aspirant may spend up to or more than its face value. The winner may be slightly ahead in monetary terms, but the total expenditures by all aspirants often exceed the face value of the rent.

Note:
  1. Jim Kenney is an undergraduate at the University of Memphis.
  2. Jim Kenney is an undergraduate at the University of Memphis.
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