The Raw Prawn

College sports are huge in the US, and in many cases they're more popular than even professional sports. Many universities lavish ungodly sums upon their sports programs, and will use unsavory tactics to try to attract recruits (Harvard's alumni magazine had a good article a while back about how athletic recruiting is changing the face of sports even in the Ivy League, where athletic scholarships are forbidden).

Why do universities put so much into their athletic programs? There can be massive windfalls for the very best, in terms of sales of apparel, tickets, and television rights. But athletics is still very much a cost-center for almost all American universities.

So why do they do it? The two most commonly cited reasons are that it increases alumni giving, and it increases applicants. The business model of American universities is very much centered on alumni donations. Student tuition, while very high, doesn't come close to covering the cost of educating a student, and alumni donations pick up the slack. As a result, universities are very keen to do anything they can to make their alumni more proud of and connected to their alma mater. Having strong sports teams is seen as an effective way to do that, since there are regular events, they may be televised, and sports rivalries necessarily entail a strong sense of pride. Having exciting sporting events is presumably a factor in prospective students' quality of life assessments, and so having strong sports teams should increase the number of applicants that a university gets. If the number of admitted students stays constant, an increase in applicants allows the college to be more selective, increasing their academic reputation.

Robert Frank, Professor of Economics at Cornell's graduate business school (and someone whom I'm a big fan of), has just published a paper looking at the magnitude of these two effects. You can read it here.

Do successful college athletic programs stimulate additional applications from prospective students and greater contributions by alumni and other donors? And if so, is it likely that additional investment in such programs is a cost-effective way of increasing these benefits?

In this paper I first consider these questions from a theoretical perspective that focuses on the economic incentives confronting institutions that participate in big-time college athletics. I then review numerous empirical studies that have attempted to measure various aspects of the relationships between athletic success and success in other domains.

The findings reported in these studies are mixed, but the overall message is easily summarized: It is that if success in athletics does generate the indirect benefits in question, the effects are almost surely very small.

I also suggest that the most important decisions confronting policy makers, both at individual institutions and at collective athletic governing bodies, do not hinge significantly on how strongly alumni giving and the quality of entering students depend on athletic success. Policies that would create incentives for all institutions to reduce their spending on big-time athletic programs would free up resources for other purposes at no cost either to alumni giving or the size of applicant pools.

Go read the paper and see the studies and lines of reasoning he uses to reach those conclusions.

The effects surely differ among universities. I would think that Stanford probably doesn't benefit a great deal from it's strong athletic program. Its academic peer institutions all have great alumni-giving records, without the benefit of a stellar athletic program. As far as applicants, Stanford will get plenty of those anyway, and those applicants for whom quality of life is very important will apply to Stanford regardless, for the beautiful weather.

The University of Michigan and Notre Dame, on the other hand, probably benefit a great deal. The increased name recognition allows them to stick out of the pack, which probably does help them to attract professors and students, and become stronger academically.

This is because they are at the very top in terms of athletic spending and prowess. I would doubt that increased athletic spending has much of an impact if you're not at the very top, however.

Full Disclosure: I was on the men's fencing team when I was at Cornell, and they have had more than their fair share of funding-related problems. Even though it's arguable how much benefit a university gets from its sports programs, I would still support fencing getting more funding :P

Robert Frank also has a great discussion of experimental research that has been done on winner-take-all games, elsewhere in the paper:

A feel for how winner-take-all markets differ from ordinary markets is afforded by experiments involving a simple auction called the entrapment game. First described by the economist Martin Shubik, this game is just like a standard auction except for one feature. The auctioneer announces to an assembled group of subjects that he is going to auction off some money - say, a $20 bill - to the highest bidder. Once the bidding opens, each successive bid must exceed the previous one by some specified amount - say, 50 cents. The special feature of the entrapment game is that once the bidding stops, not only must the highest bidder remit the amount of his bid to the auctioneer, but so must the second-highest bidder. The highest bidder then gets the $20 bill and the second-highest bidder gets nothing. For example, if the highest bid were $8 and the second-highest bid were $7.50, the auctioneer would collect a total of $15.50. The highest bidder would get the $20, for a net gain of $12; and the second-highest bidder would experience a loss of $7.50.

Players in this game face incentives much like the ones that confront participants in winner-take-all markets as they consider whether to undertake investments in performance enhancement. In both cases, by investing a little more than one's rivals, one can tip the outcome decisively in one's favor.

Although the subjects in these experiments have ranged from business executives to college undergraduates, the pattern of bidding is almost always the same. Following the opening bid, offers proceed quickly to $10, or half the amount being auctioned. There is then a pause as the subjects appear to digest the fact that, with the next bid, the two highest bids will sum to more than $20, thus taking the auctioneer off the hook. At this point, the second-highest bidder, whose bid stands at $9.50, invariably offers $10.50, apparently thinking that it would be better to have a shot at winning $9.50 than to take a sure loss of $9.50.

In most cases, all but the top two bidders drop out at this point, and the top two quickly escalate their bids. As the bidding approaches $20, there is a second pause, this time as the top bidders appear to be pondering the fact that even the top bidder is likely to come out behind. The second bidder, at $19.50, is understandably reluctant to offer $20.50. But consider his alternative. If he drops out, he will lose $19.50 for sure. But if he offers $20.50 and wins, he will lose only 50 cents. So as long as he thinks there is even a small chance that the other bidder will drop out, it makes sense to continue. Once the $20 threshold has been crossed, the pace of the bidding quickens again, and from then on it is a war of nerves between the two remaining bidders. It is quite common for the bidding to reach $50 before someone finally yields in frustration.

One might be tempted to think that any intelligent, well-informed person would know better than to become involved in an auction whose incentives so strongly favor costly escalation. But many of the subjects in these auctions have been experienced business professionals; many others have had formal training in the theory of games and strategic interaction. For example, the psychologist Max Bazerman reports that he earned more than $17,000 by auctioning $20 bills to his MBA students while he was a professor at Northwestern University's Kellogg Graduate School of Management, which is consistently among the top-rated MBA programs in the world. In the course of almost 200 of his auctions, the top two bids never totaled less than $39, and in one instance totaled $407