RISK TAKING IN NASCAR: AN EXAMINATION OF COMPENSATING BEHAVIOR AND TOURNAMENT THEORY IN RACING

ABSTRACT NASCAR racing provides an interesting backdrop to test two theories about incentives and behavior. The compensating behavior theory predicts that if drivers race under safer conditions, they are likely to undertake riskier behavior. Using data from the NEXTEL Cup Series, the paper finds that once drivers were required to wear a new safety device, there was a change in the percentage of miles run under caution. That is, racers drove more aggressive and riskier after October 2001. Tournament theory predicts that non-linear rewards promote more competitive behavior. Starting in 2004, the method for deciding the NEXTEL season champion was changed to encourage racing throughout the season. To compete for the season championship, drivers are motivated to drive safely and stay in each of the first 26 races. After that point only the top ten drivers compete for the series championship, racing to win the non-linear season-ending awards. As a result, we expect racers to drive riskier in the second part of the season. The paper compares NEXTEL driving behavior across three NASCAR series (the other two not competing under the new structure). The results support the theory that NEXTEL Cup Series racers do drive riskier over the last portion of the season. There is not a similar change in the behavior of drivers in the other two series. INTRODUCTION In 2001, Dale Earnhardt, seven-time NASCAR driving champion, was killed in a wreck in NASCAR's Daytona 500. The sport of stock car racing has changed in several ways since that date, including improved driver safety and winning strategy. Eleven months after Earnhardt's death, all NASCAR drivers were required to wear a new safety device. (1) Beginning in 2004, NEXTEL became the title sponsor of NASCAR's premier racing series and instituted a "Chase for the Champion" tournament format for the last 10 races of the season. This paper uses a proxy for risk taking (the percentage of miles run under caution due to accidents) and examines whether NASCAR drivers have responded to the higher level of safety (as predicted by "compensating behavior" models) combined with higher incentives for risk-taking (based on "tournament theory.") To examine the first question, data for only one NASCAR series are used. The paper asks, "Did racers drive riskier when the new safety requirements were mandated? " To answer the second question, this research takes a unique approach utilizing NASCAR's product structure to examine predictions of driver behavior under rank-order tournaments. In addition to the NEXTEL Cup series, NASCAR sponsors two other racing series, the Busch racing series and the Craftsman Truck Series. Competing with similar equipment (including cars and tracks) and with some common drivers, these second-tier series do not race under the new championship tournament structure. As a result, the difference in risk taking in these two series versus the NEXTEL Cup Series should reflect the impact of the tournament risk-taking behavior--do drivers approach winning differently with more money and prestige up for grabs? This paper is divided into several sections. First, a short history of NASCAR racing is provided. Next, a literature review addresses previous research regarding compensating behavior and tournament theory. A discussion of the data set follows. Finally, regressions and results are provided. NASCAR BACKGROUND (2) The National Association of Stock Car Auto Racing (NASCAR) was founded in 1948 to provide a sanctioning body for several types of car and truck racing. NASCAR is responsible for creating and enforcing the rules under which these races are run, scheduling the races and also for assuring that the winners are paid. (3) This paper focuses on three race series under the NASCAR umbrella: the NEXTEL Cup Series (the premier level of stock car racing); the Busch Series; these cars have lower horsepower and slightly different specifications compared to the NEXTEL series cars; and the Craftsman Truck Series (this series races modified pickup trucks). …