Tiger Woods Offers Economists a Test of Our Theory of Labor Supply
Professor Mankiw should consider incorporating the following income effects case study into his next edition of his textbook. Based on the simple labor supply theory of substitution and income effects, I predict that Tiger Woods will play in more tournaments in 2010. In 2009 (pre-discovery of his prowling) Tiger didn't play much golf . He earned "only" $10 million playing golf. If his flow of endorsement income falls from $100 million a year to $10 million year, then this loss of $90 million per year is a negative income effect. Ignoring any alimony bills (which simply compound the income effect), this income effect should cause him to work more. Note that the wages of winning a tournament do not change. The shock is to his flow of income from his endorsements. This is equivalent to losing the lottery and having money taken from you.
The bottom line is that Jacob Mincer was a more important dude than Tiger Woods. At the end of the day tapping a ball into a hole in a minimum number of strokes just isn't that important.
UPDATE: At least in the short run, Tiger Woods' announcement suggests that I'm wrong. But, the long run will offer a better test of my claim. Some have said that he has banked enough $ for the income effect to be small. But, if one's flow of endorsement income falls from $100 million to $10 million a year --- this must have real effects on time allocation.
Now, I'm aware that the basic static labor supply model can be augmented to explain Tiger's decision to play less golf in the short run. We can introduce a desire for "home production" (i.e. reconcile with wife) but this is a pinch of a cheat.
In the past, economists have used exogenous income increases such as winning the lottery to study income effects see this paper . If Tiger Woods views Kobe Bryant as a redemption role model here then he will foresee that his endorsement income will return if he returns to golf and wins. This would reinforce the "income effect" of playing more golf.
The bottom line is that Jacob Mincer was a more important dude than Tiger Woods. At the end of the day tapping a ball into a hole in a minimum number of strokes just isn't that important.
UPDATE: At least in the short run, Tiger Woods' announcement suggests that I'm wrong. But, the long run will offer a better test of my claim. Some have said that he has banked enough $ for the income effect to be small. But, if one's flow of endorsement income falls from $100 million to $10 million a year --- this must have real effects on time allocation.
Now, I'm aware that the basic static labor supply model can be augmented to explain Tiger's decision to play less golf in the short run. We can introduce a desire for "home production" (i.e. reconcile with wife) but this is a pinch of a cheat.
In the past, economists have used exogenous income increases such as winning the lottery to study income effects see this paper . If Tiger Woods views Kobe Bryant as a redemption role model here then he will foresee that his endorsement income will return if he returns to golf and wins. This would reinforce the "income effect" of playing more golf.
posted by Matthew Kahn at 7:54 AM
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