Computing the Probability of Winning a Competition with an Application to Horse Races

We use the theoretical framework of tournament theory to obtain a statistical foundation for the most popular contest function used in the economics literature. We show that once one solves the issue of measuring output as it appears in tournament theory, one can obtain maximum likelihood estimates of the parameters in the contest function based on the past performance of the competitors. The findings are used to predict the odds of winning a horse race and the results compared with the odds generated by the actual wagers.