Sign in / Join

Negotiating Over the Rules of The Game

The saga of the America's Cup moves from the courtroom to the sea next month, off the coast of Valencia. Two billionaire tycoons, Ernesto Bertarelli and Larry Ellison, have been battling thus far with lawyers and design teams, will set sail to determine who has the fastest "boat." Maybe. There's one more lawsuit to sort out, and the holder of the cup (Bertarelli) claims that if he loses, he'll forfeit the race.

The issue of interest to economists here is the system in place for determining the rules of the game. Here is how Christopher S. Stewart describes it, in Men's Journal:

The original rules of the Cup are as open to interpretation as symbolist poetry, but essentially say that a Cup defender picks a challenger of record, and then the two determine race terms — rules, venue, type of boat — for the next race. The other boats are beholden to these rules. But after Bertarelli won the last America’s Cup in 2007 (the race is held about every three years), a year in which Ellison didn’t even make it out of the challenger eliminations, he picked a little-known Spanish yacht club as challenger of record for the next face-off. Ellison quickly pointed out that the Spanish club was a “sham,” a puppet of Bertarelli — it didn’t have any facilities, officers, or recent regattas, all requirements to be a challenger of record. He believed that Bertarelli, whose boat represents Swiss yacht club Société Nautique de Genève (SNG), was trying to rig the race. “[Bertarelli] wanted to cheat,” he told me. “He wanted the jury to work for him.”

So Ellison’s team and the club it represents—the Golden Gate Yacht Club— sued in New York Supreme Court, the official race arbiter, winning the case on appeal and thrusting themselves into the official Cup challenger slot. Most thought this would make way for simply finalizing race terms, but the two billionaires couldn’t seem to agree on anything. Cup rules dictate that if race terms cannot be agreed upon, the competition simply reverts to the rules set out in the DOG (ed: deed of gift) and becomes a simple one-on-one between defender and the first challenger. “It’s like George Steinbrenner on one side and George Steinbrenner on the other,” John Rousmaniere, noted chronicler of the Cup, told me. “And there’s no baseball commissioner to bring order.”

The reliance on the original deed of gift, and its de minimus approach to defining the rules has allowed the race to evolve with changes in technology and economic conditions. But the absence of rules and a system of arbitration makes this game ill-suited (or perhaps only suited, depending on your point of view) for the especially aggressive combatants required to finance the competition. Moreover, a peculiar combination of one specific archaic rule governing construction of the ship, and the absence of a well designed set of rules in general, have contributed to the current bizarre situation.

The archaic rule requires that the ship be built in the country of the Yacht Club sponsoring it. In the modern age where materials, design, and components are routinely outsourced, this rule boils down to an assembly requirement, which Bertarelli is alleged to have violated by having his sail manufactured in Spain, rather than Switzerland (this interesting story has the details). It is not clear to me why Ellison is suing to keep Bertarelli from using this sail, except perhaps as part of his negotiating tactics over such issues as the wind limit and other rules of the race. Hopefully the dust will settle from the courtroom battle and the race will go on. If it does, the race will be like no other America's Cup in history. For starters, it will be the first between multihull vessels. Stewart notes that Ellison's 90 foot long trimaran can reach speeds over 50 mph, "three times faster than previous America’s Cup boats." It basically flies through the air, keeping just enough contact with the water to hold a course and retain the right to be called a yacht.

This year's version of the America's Cup is a prime example of no holds barred competition, taken to the limit. One worry is that the race will be over before the horn sounds, with one design, perhaps Ellison's, proving to be dominant... if the thing doesn't blow up from the sheer force it generates.

The issues raised by this year's edition of the America's Cup highlight the importance of a well designed system for determining the rules of competition. This is an issue that co-blogger Stefan Szymanski has written on extensively. Relying on the competitors themselves to determine the rules of the game creates the potential for bargaining failure. This lawsuit-happy bunch has confirmed that prediction in spades! But it also enhances the possibility of producing a competition of minimal interest to fans. Technological dominance could result in the latter outcome next month. Certainly, the duration of the race will be shorter given the record speeds they'll be traveling at. If so, some attention might profitably be given, not to yacht design, but design of a better system for determining the rules of the race.

The odyssey for the post began at Newmark's Door.