Prediction-market trades have turned up whose payouts nearly match college football coaches' playoff bonuses. Five line up almost exactly with Lane Kiffin's bonuses at LSU. The schools didn't place them, but third parties acting for them plausibly did.
Why would a school bet on its own success? Coaching contracts promise big bonuses for making the playoffs, advancing and winning a title. A deep playoff run can leave the athletic department owing millions it didn't budget for. A contract that pays off when the team wins covers that bill when it comes due. Like a farmer locking in a crop price, the school gives up some upside in exchange for a predictable budget.
Why go through a third party? NCAA rules forbid athletic staff from betting on games, and prediction markets count. So a school can instead pay an insurer a premium, and the insurer buys the contracts itself.
Takeaways:
- A performance bonus is a bill that only comes due when things go well.
- If people are betting on whether that success happens, you can buy a bet that pays for the bill.
- As budgets tighten and these betting markets grow, expect more of this.
Source: Josh Hendrickson, Insuring Against Success?, Economic Forces
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