Favouritism and Financial Incentives: A Natural Experiment

Principals who exercise favouritism towards certain agents may harm those who are not so favoured. Other papers have produced evidence consistent with the presence of such favouritism but have been unable to consider methods for controlling it. We address this issue in the context of a natural experiment from English soccer, where one particular league introduced professional referees in 2001-02, thereby changing the financial incentives and monitoring regime faced by these referees. Because the change was not effected in all leagues, the ‘experiment’ has both cross-sectional and intertemporal dimensions. We study the effects of professional referees on an established measure of referee bias: length of injury time in close matches. We find that referees exercised favouritism prior to professionalism but not afterwards, having controlled for selection and soccer-wide effects. The results are consistent with a financial incentive effect as a result of professional referees and indicate that subtle aspects of principal-agent relationships (such as favouritism) are amenable to contractual influence.