Are Footballers Rewarded for Luck? A Surprise Test1

Abstract

Performance related pay is a solution to an incentive problem. Theory suggests that performance related pay is optimal when inputs are unobservable and employees would otherwise lack incentives to provide effort. When labour inputs are observable, the optimal contract does not make pay contingent on output. Data on wage payments by professional English football clubs and bookmaker betting odds make it possible to test whether player pay is contingent on the stochastic element (luck) in game results, and hence consistent with performance related pay. The results shows that luck plays no role in determining wages of players in the English Premier League, and does not have a positive impact on wages in the English Football League Championship. This is consistent with the commonsense view that player inputs are largely observable or motivated by career concerns, avoiding the need for performance related pay.

Keywords: Incentives, contracts, football