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Sports Economics Test Question

2008 November 26
by Phil Miller

Suppose that next season, Derrek will be worth $5,000,000 to the Mets and will be worth $3,000,000 to the Cubs. Suppose that negotiations between any of the parties is costless and that both teams maximize profits. Suppose that Derrek just finished playing under contract for the Cubs. Discuss the difference between negotiations under the following labor market structures: free agency and the reserve clause. Based on Rottenberg’s Invariance Hypothesis, which of the two labor market structures results in the efficient outcome? Based on this hypothesis, which of the two structures would result in Derrek playing for the Mets? Describe the distribution of income under the two labor market structures.

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