Radio Sport yesterday was consumed with a debate about whether Steve Williams, the caddy for Masters winner, Adam Scott, is worth the money he is paid.
For those who don't follow golf, here is the background. Steve Williams is a New Zealander who was the professional caddy for Tiger Williams in his heyday (1999-2011). They had an acrimonious break-up two years ago, and since then Williams has been caddying for the Australian, Adam Scott. Williams' contract sees him earning 10% of Scott's prize earnings, which I gather is a typical contract for a professional caddy. Obviously, if you can caddy for one of the greats, that is a very lucrative contract indeed. (The prize for winning the Masters this year was $1.44m USD.)
Now the debate on Radio Sport concerned whether any caddy is worth that amount of money. And for an economist, "worth" would typically mean what a caddy can contribute relative to the next best alternative. Is it really the case that a top caddy can improve a golfer's winnings by more than 10%, relative to what he would earn with one of the throng of enthusiastic golf fans who would be prepared to do the job for a normal kind of salary? While there has been much commentary on the advice that Williams gave Scott on his winning shot at the Masters this week, it seems unlikely that the best caddy is really that much better than the alternative.
There is a second labour-economics question that I did not hear addressed on Radio Sport: Why are caddies paid on a commission basis (percentage of income) rather than a flat rate? The standard answers to these questions from the contract literature would be that either the golfer is more risk averse than the caddy, or that this is a hidden-information problem and that the caddy needs a financial incentive to exert the effort needed to do a good job. The former hardly seems likely given the relative incomes of the golfer and his caddy. The second is even less likely to pass the sniff test: Does it really take additional costly effort to give good advice on which club to use and how a putt is likely to break?
Instead, maybe we should be looking to the efficiency wage literature which contains a number of different theories for why above-market-clearing wages can persist in the face of unemployment. My favourite model to explain caddy wages would be Shapiro and Stiglitz's classic model of shirking. In their model, the high ("efficiency") wage persists as a preference for employment over unemployment is needed to induce a fear of being fired and hence an incentive not to shirk in the face of costly monitoring of effort. The model I have in mind for caddies is similar. The top golfers are big superstars whose flaws and foibles would be fodder for the tabloids. A caddy who works closely with a golfer is likely to have considerable information that tabloids would love to get hold of. So why might one pay above the market-clearing wage for a caddy? So that the cost to the caddy of losing his job would not be dwarfed by payments he might be offered by a tabloid. And why pay caddies on a commission basis? Because the greater is a golfer's earnings, the greater is his stardom, the more a tabloid would be prepared to pay for information, and hence the greater would be the needed efficiency wage.
What other explanations explain the twin puzzle of high remuneration and a percentage-of-earnings contract. If I were teaching labour economics, I would set this as an essay question.