Monday, January 31, 2005

Rockies Ticket Prices 

From the Denver Post:

In the movie, "Max," John Cusack, in the title role, was asked why the paintings in his art gallery were so expensive.

"So people will buy them," Max said.

So, demand curves for art slope upward? No. Cusack's character suggests that prices contain information regarding the quality of the artwork.

A few years ago, the Rockies started a "premium," or more expensive, pricing program for select single-game tickets. There are always bigger crowds at the more expensive games than those played at regular price.
College football teams do this too. To watch the Nebraska Cornhuskers play the Missouri Tigers in Columbia, you'll have to pay a higher ticket price than if you watch Missouri play, say, Western Illinois in Columbia. The NU game will also come close to selling out. The other game won't. Once again, this must be evidence that demand curves slope upward. No. It means the demand for these "premium" games is larger.

For a fifth consecutive season, the Rockies, to their credit, have acknowledged their disappointing on-field performance by not raising their season-ticket prices. No wonder attendance is down from the early years. In baseball, like art, people won't pay to look at a cheap product.
Is the columnist for real here, or is he just playing with us? Setting ticket prices to sporting events is a classic case of price-setting under uncertain demand. The Rockies don't know what the demand for their games will be, but they have a good idea of what fans want. Fans make their purchase decisions based upon the expected quality of the product (among other things). They base their decision to buy tickets, especially season tickets, with an eye towards last season and with an eye towards the team's off-season moves (see here). This year's Rockies roster will contain players from last year and players acquired in the offseason. To estimate the quality of the current team, fans will make a decision on how they believe players from
last year's team still on the roster will perform this year. If last year's team didn't perform well, all else equal, it is less likely that those held over from last year will perform well this year. That leads to a decrease in demand for this year's tickets. Teams respond by lowering (or not raising) their ticket prices. The opposite case happens when a team performs well, especially unexpectedly well.

The NFL and Tie-in Sales 

The NFL's Washington Redskins now require their customers to pay by cash, by cheque, or with a Redskins Extra Points MasterCard (from the Washington Post, registration required). The credit card, known as an affinity card, gives users points toward Redskin merchandise for each dollar spent and yields some additional revenue for the team, especially if cardholders use the card for additional purchases beyond just buying tickets to Redskins games.

But why would a profit-maximizing team require customers to use an affinity credit card? The usual argument by non-economists is that tie-in sales are used to extend the firm's monopoly in one product (the tying product, in this case tickets to Redskins games) to another that is sold in a competitive market (the tied good, in this case the credit card). Economists react to this argument by pointing out that usually a firm with monopoly power can best maximize its profits by raising its price rather than tying their good to the sale of some other product, especially if doing so increases transaction costs for their customers, making them unhappy.

Is that the case here? Not entirely. The team argues that it requires use the affinity card because,
"It helps process our tickets and get them out faster."
Maybe. But if the team feels some pressure not to extract the full monopoly price from its customers (and Phil Miller thinks is a strong possibility in baseball), then it makes sense for them to tie ticket sales to their affinity credit card as an indirect way of extracting more consumer surplus from the ticket purchasers. The example could be analogous to the gas stations that required customers to purchase oil changes or lucky rabbit feet in order to buy gasoline back in the late 1970s when gas prices were fixed below the market clearing price.

I am not arguing that NFL ticket prices are fixed by some regulation below the monopoly price; but if there are P.R. reasons for not directly extracting the maximum price, using tie-in sales to capture more profits can make sense if the benefits outweight costs.

College football in the dock 

A bizarre case unfolded in a Memphis Federal court last week, without getting much national attention. The trial is that of Alabama booster Logan Young, accused of paying $150,000 to a high school football coach in order to "deliver" Albert Means to Tuscaloosa to play for the Crimson tide.

Tony Barnhart's piece in yesterday's Atlanta Journal-Constitution covers the facts, and indeed, some small dramas from last week's testimony. Like Tony, I sure wish this trial was on Court TV.

Apart from exposing the seamy underbelly of big money, big time college football, there are several things worth noting about the case. Young is charged with paying someone to influence a kid's decision. No doubt, NCAA rules attempt to stop this, but exactly what Federal law did he violate? He's being tried under the RICO (racketeering) statute, which adds to the evidence that RICO's scope is too broadly defined, allowing too much latitude to prosecutors. Perhaps Greg or Mike at the Sports Law Blog can explain this.

Second, Barnhart notes the following:
Not only is Young on trial this week, college athletics is as well. Lang [the high school coach] testified last week that eight schools -- Alabama, Arkansas, Georgia, Kentucky, Michigan State, Ole Miss, Tennessee and Memphis -- offered him money and other favors for Means' services.

The trial, which began last Monday, has exposed an ugly side of college athletics that is usually only whispered about with a wink and a nod. But it begs the question: If schools have become that aggressive when it comes to a lineman like Means, what must they be doing to acquire superstar quarterbacks, running backs and receivers?
Now, as an economist understands it, market prices are the result of competition. Assume for the sake of argument that Young did pay Lang, as alleged. But surely he would rather have paid $25,000 for getting Means to Alabama than $150,000. If indeed there was bidding for Means' services, it's a safe bet that the next highest bid was not far from $150,000.

Update: Greg at the Sports Law Blog answered the bell, and examines the puzzling nature of RICO's relevance to the case.

Sunday, January 30, 2005

Angelos: I'm in the news! 

What else to make of the Orioles trading for a washed-up clubhouse cancer who will never hit 60 home runs again without the aid of cork or pills?

Well, theory #1 comes from P.T. Barnum -- there's a sucker born every minute -- and MSNBC's Mike Celizic is in that camp:
The answer is, "Jim Beattie and Mike Flanagan."

The question is, "Who are the dunderheads running the Baltimore Orioles?"

The word is these two co-general manager geniuses have been smitten by the bold idea of trading with the Cubs for Sammy Sosa. When this deal becomes official, it will go down as the worst acquisition of a formerly potent superstar since the Mets signed George Foster.
And that's just the opening salvo from Celizic's can of whoop-ass.

But let's look at the details. The Cubs are eating $10m of Sosa's salary, leaving the Orioles on the hook for one year at $7m. Assuming the O's gave up little on the talent shipped the other way, this looks like a classic case of pure gains from trade.

The Cubs are rid of their clubhouse cancer, and can get their minds focused on competing against the super-tough Cards and potentially tough Astros (whose outfield looks like a disaster, but with starting pitching to die for). Check.

What's in it for the Orioles? Well, he'll be in a contract year if the trade goes through. Having signed on to the deal, it looks like Sammy is planning on doing some image-polishing this year. Regardless, whether it's home runs or tantrums, the Orioles are sure to get publicity from Sosa. Now that the O's are in a dogfight for the DC market, publicity is golden. That's my take, and that of Thomas Boswell too, who gets one right for a change ;)

I'm guessing that my fellow saber-heads will join the Celizic camp, but remember, the bottom line encompasses more than this year's won/lost record. Expect more outbursts from Angelos on just about any topic, for this very reason. Angelos wants column inches in the Washington Post and air-time on the local newscasts, and he'll pay or say most anything to get it. Even if it means writing a check to Sammy Sosa.

Subsidy Fight 

While looking around for Carlos Delgado stuff yesterday, I ran across an article in the Miami Herald describing a subsidy Wayne Huizenga received many years ago to fit his football stadium to allow baseball to be played there. Here are the first few paragraphs:

State Senate President Tom Lee suggested on Wednesday that he'd like to stop Wayne Huizenga from receiving millions in tax breaks for refurbishing his stadium for the Florida Marlins because the team is leaving the ballpark and is seeking a $60 million subsidy identical to what Huizenga won years ago.

''I really want to look into how that was done, in what context it was done and what promises were made,'' Lee said. ``But there are allegations developing that [getting a new subsidy] would essentially represent a double-dip by the Marlins.''

Huizenga, the team's former owner, said through a spokesman that he's entitled to the money and will fight in court if the Legislature tries to take it away.

Whether the tax fight reaches that point is anyone's guess, although the Marlins' request has clearly ushered in a free-for-all in the Legislature.

''We've received phone calls from the [Tampa Bay] Devil Rays and everybody who would like to get on that bandwagon if they could. And the well here in Florida is only so deep,'' Lee said.

The Marlins ran afoul of Lee recently for suggesting the club might leave Florida if the Legislature doesn't approve the subsidy to help the team build a new stadium in Miami. Lee said at the time that he doesn't ``negotiate with terrorists.''

Read more here.

Peter Angelos is Upset 

And it's not about the Nationals. The Baltimore Orioles wanted Carlos Delgado, and they got in a bidding war with the Marlins for his services (bidding wars kick arse if you are the one being bidded over!) and lost. What does Peter Angelos have to say? Well, he thinks the market is flawed:

"The [Orioles'] offers, I thought, certainly were generous, and some might think beyond what they should have been," Angelos said. "They're trying to improve the club and demonstrate to fans that we're doing everything we can to make the club competitive with Boston and New York, and we're heading in that direction.

"But the market needs to be reassessed. The more millions that are squandered, the more fans will have to pay through increased ticket prices and concessions. Major League Baseball has to come to grips with the crisis it's in.

"These salaries are beyond what 90 percent of the teams are able to pay. It's a problem that has to be dealt with in the future."
The market isn't flawed, but Angelos' argument is. High salaries don't drive high ticket prices. High ticket prices drive high salaries. In other words, demand curves slope downward but they do shift out. If demand is elastic, ticket revenue will fall if ticket prices are increased. If demand is inelastic, ticket revenue will rise if ticket prices are increased. Many studies of the demand for baseball suggest that demand is inelastic around the ticket prices that are set.

But why don't teams raise prices anyways in order to generate additional ticket revenue? Baseball teams sell multiple complementary products (games, concessions, parking). Team revenue generated at the home stadium is the sum of the ticket revenue and the revenues from sales of these complementary products. If ticket prices are increased and demand is inelastic, ticket revenue will increase but the revenues from the complementary products will fall, likely more than offsetting the ticket revenue increase. So why would a team raise salaries and then raise ticket prices?

So Angelos is upset. He now has another MLB team within 40 miles of his stadium. He didn't get Delgado. On the bright side, he did get Sammy Sosa, the man who might just as well spell the word "team" as "tiem" since it has an I and a me.

Wassup with the Marlins? 

The signing of Carlos Delgado to a 4-year $52 million contract has raised some eyebrows. According to this article in the Miami Herald, with last year's $52 million payroll, the Marlins lost $20 million. They are requesting $60 million in public funds to help construct a new stadium because their current stadium, so they say, cannot produce the revenue needed to compete. They've also looked at leaving sunny Miami for Sin City and, possibly, Portland, Or. (who said there aren't enough cities big enough to host 30 MLB teams?). So what do the Marlins do in the offseason? They add $13 million in payroll (so far) for 2005. Andrew Zimbalist thinks Marlins owner Jeffrey Loria is acting "in a peculiar way":

''Jeffrey Loria is behaving in a peculiar way,'' Andrew Zimbalist, a sports economist, baseball author and professor at Smith College in Massachusetts, said of the Marlins owner. ''What one would like to think is [Delgado] creates a cache around the franchise to get over the top on a stadium deal or excite [the mayors] in Las Vegas or Portland, Oregon'' for possible relocation of the team.
Dan Le Batard of the Miami Herald has some questions. He wonders where the money came from.

Carlos Delgado will be worth the money if he is expected to generate sufficient revenue to cover his salary. Is this happening? There are indications in this ESPN.com article that season ticket sales for the Marlins already have gotten a nice boost:

Florida is mostly interested in Delgado producing runs the way he did with Toronto, where he hit at least 30 homers each of the past eight seasons. He's the kind of hitter the Marlins have long coveted -- a left-handed slugger capable of altering the balance of power in the NL East. He's also a box-office draw who boosted season-ticket sales at least fivefold this week.
I assume this doesn't mean they had only sold 1 so far and have now sold 6.

Even if he doesn't generate sufficient revenues, his signing may provide a short-term boost to lobbying efforts to lock down some public financing for a new stadium, as Zimbalist noted above. Delgado's signing has excited his new teammates and some Marlin fans. That same sort of excitation can work with public officials too.

But tempering the excitation will be questions regarding how if the Marlins can't generate revenue, why are they adding salary?

A dynasty, at a modest price 

Money wins championships, goes the refrain, particularly in major league baseball. Being able to afford top players matters, of course, but what you do with them matters even more. Case in point: the New England Patriots.

Pop quiz: which of the following is true about the Patriots' $77m payroll?
a) it ranks 24th among the 32 NFL teams
b) the Redskins' payroll of $117.9m is more than 50% higher
c) it's $22m less than Peyton Manning's (7 year) contract
d) all of the above are true
The answer is d).

The facts in the list are taken from Maske and Shapiro's column in today's Washington Post. The column focuses on the secrets of the Patriots' success, in an era when the salary cap supposedly ruled out sustained championship level performance.

The column is a useful and interesting account, but the following made me think twice:
The Patriots pick players that they think will fit their system, and many end up being willing to take less money to stay with the club. Middle linebacker Tedy Bruschi negotiated a contract extension last summer, without an agent, that included a $3.5 million signing bonus and salaries totaling $3.9 million for the 2005, '06 and '07 seasons. Otherwise, he would have been an unrestricted free agent after this season. Some agents and players leaguewide were upset that Bruschi settled for such a modest deal.
In most walks of life, people routinely work for less money if the job is in the right location or with the right organization. This is a common everyday occurrence, and one never hears any grumbling when a worker turns down money in exchange for something more valuable to him. In Bruschi's case, this "something" would seem to be the opportunity to win. Can you blame him?

I imagine the gripe is that Bruschi's contract would help "set the market" wage for linebackers. I can envision a small impact in an arbitration system such as baseball, but not in the NFL's system. The absence of Bruschi from the labor market equates to the absence of a substitute, which raises the demand for other linebackers.

But the bad economics aside, it's the greed that gets me here. If Bruschi wants to re-up with the Pats for a $3.5m bonus, that's none of Junior Seau's business (to pick a name at random). I always side with the players when they are criticized for taking what owners are willing to pay them. But they can't have it both ways. Criticizing Bruschi for placing championships ahead of their income exposes both their greed, and how little they care about winning themselves.

Friday, January 28, 2005

More on the Economic Effects of the NHL Lockout 

The general theme of this Bloomberg.com article is that because NHL hockey teams have not been playing, city-owned arenas and parking lots have been receiving considerably less revenue [Thanks to BrianF for the pointer]. Are these lost revenues good indications of the losses to the various levels of gubmnt?

What are people spending their money on if they are not attending hockey games? Are they going to movies? Are they attending college or minor league hockey (or WWF)? Are they buying more video games, flowers, or CDs of Vivaldi's Four Seasons? Whatever they are doing (unless they are squirreling the cash away), they are diverting their spending to other sectors of the economy. Is none of this diverted spending finding its way back into the city's coffers?

As an example, consider the situation in Detroit:
Detroit expects it would lose $8 million to $9 million should the league cancel its season, even if it were to book make- up events at Joe Louis Arena, says Albert Fields, the city's deputy chief operating officer.
I will hazard a guess that they have no idea how much their revenues from other sources might have increased because hockey fans changed their behaviour and spent their money on something else in the city. Also,
Ronald Ruffin, 57, director of the parking department, says that without hockey, the city would probably have to increase parking fees citywide, boost fine-collection efforts and tap the general fund.
The implication in this quote is that the city charges a satisficing fee for parking and that the city engages in satisficing levels of fine-collection efforts. Cities do not usually have profit-maximizing objective functions, and so it is probably not appropriate for them to be charging the profit-maximizing fees for parking. But if they had some other goal(s) in mind when they set the parking fees, why would the hockey lockout have an impact on the pursuit of those goals? It seems unusual for the city to have a lexicographic ordering of its objectives with a revenue threshhold as its primary objective.

Furthermore, the idea that a city would step up fine-collection efforts because of the hockey lockout puzzles me. Perhaps I have studied too much Gary Becker-type economic analysis of law, crime, and punishment; perhaps I have read too many articles on the optimal rate of enforcement of laws; but it seems reasonable to me that if there is some goal in setting the level of fine-collection efforts, this goal hasn't changed just because of the hockey lockout; usually the optimal rate of detection and punishment is related to goals of optimal deterrence.

The only reason to change the city's efforts at fine-collecting would be that they had a revenue target or threshhold, which is not consistent with the standard approach to the optimal amount of law enforcement (though maybe it does enter into the objective functions of politicians and bureaucrats making the decisions!)

But what really caused me consternation when I read this article was the following:
Idle players will pay less in income taxes, costing the U.S. Treasury about $354 million and states about $57 million, says Norman Cherrey, an accountant for several players.
Yes, the hockey players will pay much less in income taxes. But the people who receive the proceeds of the diverted spending will pay more in income taxes. The effects will not cancel each other out completely, but they will offset each other to a considerable extent: Assuming hockey players on average have a higher marginal rate of taxation than those who receive the diverted spending, the net effect will be that the US and state gubmnts will lose some tax revenues, but nowhere near $411m.

Thursday, January 27, 2005

Banks are Pressuring NHL Owners to Settle 

Darren Rovell, of ESPN.com, reported on Canada's Sportsnet Thursday evening (though I cannot find this on the ESPN website) that many NHL owners who own their arenas are up to their eyeballs in debt for those arenas, and the creditors are pushing them to settle. The crack in owner solidarity, should one develop, could very well come from this pressure.

This thesis is consistent with other economic phenomena, e.g. that banks have been the major beneficiaries of financial aid to farmers. If farms go belly up, the banks lose on the loans; but if the farms can be kept alive, the farmers may struggle, but the banks will get their money. The analogy for NHL owners is that if the team goes skates-up, the creditors stand to lose a lot of money. Consequently, the creditors who are most worried about losing the most money are very interested in a quick settlement to the lockout.

UEFA goes protectionist 

Teams in England's Premier League are full of imported players. The result is high-quality football, far superior to what I witnessed when living there in the 70s, when the teams were overwhelmingly of local origin. Chalk one up for the free movement of labor, and the benefits that flow from the European Union.

But UEFA wants to fiddle with that.
From the start of the 2007 season, it is proposed that any club qualifying for a European competition must have no more than 25 players in their first-team squad. Four of those players, however, must be home-grown, two of them having been trained between the ages of 15 and 21 by the club's own youth training programme, while two others could be developed by other clubs, provided these clubs are part of the same national association as the buying club.
The Premier League, which sells the most valuable package in the global television market, is understandably not enthused by the proposal. The vote among EPL clubs was 16-4 against supporting UEFA, so they will fight the proposal. Good luck to them.

Government and reform at Oxford 

Oxford remains a fabulous university, but it is not what it could be. As elite American institutions continue to move forward, it has become clear that being tethered to the government is the root of Oxford's problem. Here is Simon Jenkins, writing in The Times:
Forty years ago the Oxford sage, Lord Franks, returned from rebuilding Europe, setting up Nato and forging a special relationship with America to try something easy. He tried to reform Oxford. He failed. It still defies reform. And where Oxford refuses to lead, Cambridge, London and the rest meekly follow. They have collapsed into the arms of government. They are institutionally dependent. They simply beg for more.
What they get is resistance to tuition increases, and an under-funded institution. But the problem is more than insufficient tuition. Whereas Harvard alumni give liberally long after leaving campus, education in England is regarded as a right endowed by the state. In that culture it makes little sense to substitute your own money for the government's, and write a check to Oxford. The endowment - an enormous asset for Harvard - suffers as a result. Government money is thus a curse, not a blessing, for Oxford.

Complicating matters, Oxford's organizational structure - a loose confederation of colleges - retards change and reinforces the status quo. Here's more from Jenkins:
Both Peel and Gladstone lost their Oxford parliamentary seats for advocating reform. The place is, as Franks said, a "two-hatted monster", a government university composed of private colleges. Franks found the colleges self-satisfied, reactionary and decisive only in indecision. Most still are.
I wonder where Oxford will be a century from now if resistance to change continues its rule. Jenkins advocates a radical break from government, and I think he's right. But will the "other hat" allow such a break to take place? The combination of government and faculty can be fatal.

Wednesday, January 26, 2005

The Superbowl: an even split? 

As I am writing this, Tradesports.com has the contract for New England minus 6.5 points selling at about 53.5 -54.5 cents. I gather this means that, on average, the market of betters thinks there is a slightly better-than-even chance that New England will defeat Philadelphia in the Superbowl by 7 or more points. So far, Skip has said he doesn't think the Patriots will cover the spread. Brian has said he thinks the Patriots will win. And Phil has posted that he, too, thinks the Patriots will win. Unfortunately, neither Brian nor Phil has gone out on a limb to state unequivocally that they expect the Patriots to cover the spread.

I've read all the discussions so far, here and elsewhere. I have to pick the Eagles plus the 6.5 or 7 points. My main reason? The odds makers in Vegas initially set the spread at 6 points, but the betting drove it up, yet I see no reason for it to have gone up. Further, all the talk about how impressive the Patriots have been seems to ignore how well the Eagles have done, too.

How confident am I? Despite my pick, I am not placing an order with Tradesports.

I Gotta Pick the Pats 

I agree with Mitch Albom here. The Pats have just completely shut down the number one offense, they shredded the number one defense, and are going somewhere where they've been twice before under Belichick. Moreover, they went 14-2 in the better conference. And here's the completely irrational reason - I'm good friends with Adam Vinateri's cousin. Other than that last reason, I'm marginal ;-) .

Hockey Substitutes and Complements 

I posted earlier about what hockey players and hockey teams are doing to while away the time away from NHL games. What are hockey fans doing? As we'd expect, subsitute forms of entertainment have seen a boost while complementary forms of entertainment are feeling a bit of a pinch. On the subsitute side, minor league hockey attendance is doing well. So is college hockey, especially in NHL cities where current college hockey teams, historically, that typically have attendance below capacity. On the complementary side, some sports bars in Toronto, Ontario aren't doing so well.

Tuesday, January 25, 2005

A Reluctant Belichick Admirer 

Bill Belichick can really coach. Sure, that's hardly news, but for me, it is an admission into which I grudgingly arrived last season. I don’t pull for Boston teams. I have never cared much for Belichick’s public persona. His Browns’ stint supplied seemingly ample evidence of the "great coordinator – lousy head coach" syndrome. Yet, his team’s recovery from the early season debacle last year coupled with a Super Bowl trip with an injury-depleted secondary this season has made me a true believer.

From a managerial perspective, Belechick’s rise illustrates important decision skills. With the Browns from 1991-95, he lived and died by "the system" that he borrowed from his New York Giants's days-- conservative offense-great defense. He knocked heads with his best QB, Bernie Kosar. He tried to make every decision. He treated the media and fans as a nuisance. All in all, he failed badly with a 41-55 record in Cleveland and his first year with the Patriots.

Since then, his teams have racked up a 48-16 record with three Super Bowl trips. He learned valuable lessons in Cleveland about managing based on the resources at hand – not on aping some system. His offense has been diverse within and across seasons, exploiting personnel to great effect. He has distributed key decision rights to coordinators, while excelling at greatest gift – making adjustments that take the other team out of strengths.

The decision that won me over completely was his use of Troy Brown, a wide receiver, as a part-time defensive back. How many coaches are flexible or brave enough to do that no matter how depleted their secondary? In the NFL world of hyperspecialized, monkey-see-monkey-do coaching, the answer is not many. It’s a throwback to a time, as John Madden puts it, where coaches thought in terms of "football players" instead of narrowly defined labels such as wide-receiver. Who knows, maybe a Belichick team will line up in the 70s-style, "pro-set" with two real running backs one of these days. If they do, I might even become Patriots fan.

Monday, January 24, 2005

Super Bowl odds 

The Patriots opened as 6 point favorites over the Eagles. As I write, the prices at USAToday.com have them favored by a full touchdown.

That's a bit rich in my estimation. Belichick's brilliance might just be overpriced here (see the story in the first link, and you might get the same sense as me).

The Patriots are formidable, but not invincible, and the Eagles are a solid team. I'll take the Eagles and seven points.

Sunday, January 23, 2005

Icing the kicker 

Dr. Z (Paul Zimmerman) of SI notes the following:
[A]n article from the Science News ... came to the following conclusion, based on the input of two statisticians during the 2002 and 2003 seasons: In pressure situations (three minutes or less to go, a kick that would create a tie or a lead change) 101 of 139 pressure kicks (73 percent) were good. But when the defense called time out and iced the kicker, the percentage drops to 63 (24 of 38 kicks).
Dr. Z is an astute observer of the game. He admits to being befuddled by probability estimation, but has the good sense to be wary of results from small samples. So he called on the boys from Stats, Inc. to investigate more thoroughly:
I was thinking about this whole icing matter, so I sent my query along to the good Doctor Stamms of Stats, Inc. He came up with the following: Pressure kicks (using the same guidelines as described above, except that they're in the last two minutes, not three) since 1991, regular season -- 457 of 637 (71.7 percent) made, without icing on them. After icing, the number is 152 of 211 (72 percent). So it's a push. Next week we'll discuss kicks with frosting instead of icing.
Moral of the story? This is an unhappy thing to say for an academic, but beware of what you read in Science News.

How to Increase the Demand for Curling 

Curling is a great northern sport, and Canadian teams often win world championships. For the past 15 years, the men's world championships and the women's world championships (both referred to as "the worlds") have been held at the same time, leading to considerable congestion on the rinks, trying to fit in all the games. As a result,
The World Curling Federation decided a year ago that beginning next year it will split the men's and women's world curling championship into two separate events. The men's and women's championships were combined into one in 1989. [This link and these quotes courtesy of BrianF]
But Colleen Jones, skip (sort of like a captain of the four-member team) of a world champion Canadian curling team, does not like the idea. She says that if the men's and women's worlds are split, people will not want to watch the women play. I do not agree with her, but I am certainly intrigued by her suggestion:
``I think the women are going to have to curl naked in order to get people out there,'' the Canadian skip said Monday. ``I'm not kidding. You're going to have to hope for an Anna Kournikova to come along to really jazz it up.''
Well, that's one way to increase the demand!

To read more about curling, see here and here.

"The man who killed the NHL?" 

Here's an interesting article, with lots of personal and economic background, on NHL commissioner Gary Bettman. The record shows that Bettman is no dolt. But he seems hell-bent on restructuring the league around principles he helped institute in the NBA.

Kudos to Mac Engel of the Star Telegram for giving us a view of "the man who killed the NHL."

Saturday, January 22, 2005

Outside Opportunities 

It looks like the NHL season is going to be cancelled. Players are being urged to find another league to play in to keep up their games.

Absolute bargaining power, simply put, is the willingness and ability of a negotiator to walk away from negotiations. Relative bargaining power is the bargaining power of one negotiator compared to that of another negotiator. One of the determinants of relative (and absolute) bargaining power in negotiations between unions and firms are the outside opportunities of employers and employees. If the employees have alternative sources of income, that improves their bargaining power. If the employers can find resources to replace the workers or if they can take their capital resources and put them to use in some other productive capacity, that improves their bargaining power. We know the players have imperfect alternatives to the NHL. What do the owners have?

Well, the company that owns the Minnesota Wild has a lacrosse team (the Minnesota Swarm) that they are now fielding in the Xcel Energy Center (home of the Wild). It ain't a perfect substitute and its owners are allowing anybody who bought a ticket to the first game to go to next Friday's home game, but it is a substitute nonetheless.

Clemens Signs for $18m. 

Co-blogger Phil Miller posted earlier that because Clemens and the Houston Astros were so far apart in their arbitration offers, it was likely they would end up actually going to arbitration rather than settling on a contract.

Phil was right in general, but in this case the general tendencies didn't pan out. Here are two reasons not mentioned by the Washington Post that Clemens and the Astros settled on a one-year contract for $18m/yr:
  1. Clemens' expected additions to the total revenues of the Astros almost surely exceed $18m for next year. The Astros would have lost money by not signing him to a contract like this.
  2. Clemens will now be the most highly paid [in nominal U.S. dollars] pitcher in the history of Major League Baseball. Given what I read about him while he pitched for the Toronto Blue Jays, this status would be worth quite a bit to him.

Friday, January 21, 2005

What Do Non-profits Do with their Surpluses? 

When an institution is organized as a not-for-profit institution, this classification does not imply that those in charge do not seek to maximize the difference between revenues and costs. What it means is that, for tax purposes, the not-for-profit must spend everything it takes in - its managers cannot turn over any net income to owners/shareholders. Colleges are not-for-profit institutions. So what sorts of things do colleges spend their money on when they receive a windfall, expected or unexpected? Here are two examples related to the world of collegiate sports.

The University of Utah (from the Chronicle of Higher Education):
As if their football team's 12-0 record were not reason enough for students at the University of Utah to celebrate, here's one more: The campus bookstore will give a 5-percent discount on new and used textbooks this semester, and the credit goes to the university's football team.

The Utes' gridiron success has caused a surge in the bookstore's sales of T-shirts, sweatshirts, and other merchandise bearing the university's logo. Profits are more than double the previous record, set in 1998, when Utah's men's basketball team made it to the NCAA Final Four, says Earl L. Clegg, director of the bookstore.
From Minnesota State University, Mankato (the "MIT of the Midwest"):
Minnesota State University, Mankato is examining new ways to promote Maverick athletics as part of its integrated marketing initiative for the entire university.
and later:
The Greater Mankato Area Chamber of Commerce has pledged financial support for the athletic plan, and MSU will earmark a portion of its revenues from the relocated Jan. 14 men’s hockey game at Xcel Center to help fund the effort.
Minnesota State's Athletic Director, Kevin Buisman, was roundly criticized for moving a home hockey game against Minnesota up to the hockey-starved Xcel Energy Center, the home of the NHL's Minnesota Wild. That move is expected to bring in an additional $140,000 in gross revenue to the University (Buisman believed the move would bring about $100,000 in revenue to the athletic department).

Blind faith? 

George Vecsey gives voice to skeptics of the grandiose plans for spurring development on Manhattan's West Side by having the NFL drop by 10 times a year, and the Olympic Games visit in 2012.
"There is almost a religious belief in the Olympics," said New York City Councilwoman Christine C. Quinn, who represents the West Side neighborhood that would be affected by any growth.

"Their belief in the Olympics has blinded them." ...

"Not to sound too sportsy, but it's like a Hail Mary pass," Quinn said of the intense pressure to start the giant earthmovers.
One possibility is that the earthmovers are the pressure. A Manhattan stadium might not develop Ms. Quinn's neighborhood, but it would surely contribute to the bottom line of the developers themselves.

On Bob Feller 

The post on Bob Feller's self-imposed pay cut was picked up by The Blurred Brain Blog (!), where Tim added some relevant information:

After the pay cut he made $45,000. Of course $45,000 ain't what it used to be.

In 2003, $45,000.00 from 1950 is worth:

$343,850.00 using the Consumer Price Index
$287,586.21 using the GDP deflator
$571,714.59 using the unskilled wage
That's peanuts relative to today's salaries! Which prompts the question, is something wrong with the indexes?

In a word, no. Salaries in MLB today are an order of magnitude higher for two reasons. (1) Growth in media revenue since Feller's time has been astronomical. Media money has taken over from gate revenue as the financial driver of the game, and hence a player's value. (2) Players in Feller's time were subject to the reserve clause.

The reserve clause limited a player's negotiating power to the team which held (or last held) his contract. Hence Feller's opportunities were essentially to sign for what the Indians offered him, or go back to the farm and grow beans. Teams could, and did, use the reserve clause to hold wages well below the value of players during this period.

Given this environment, Feller's act of penance is all the more remarkable.

Gender fender-bender 

In today's WSJ, Harvard Professor Ruth R. Wisse addresses the imbroglio triggered by Larry Summers' speculation about speculations on the dearth of female scientists. It's a magnificent defense of Summers. The beginning:
Last week, the president of Harvard, Lawrence H. Summers, inadvertently provided further evidence of the opposition to free inquiry that currently governs our institutions of higher learning. Invited to speculate off the record on the "underrepresentation" of women in science, President Summers threw out some hypotheses, including one about innate differentials in aptitude between men and women, that may account for the phenomenon. At this point in his remarks, an MIT female professor of science quit the room, declaring to the press that she couldn't breathe because "this kind of bias makes me physically ill."

"What better proof than she of Summers' thesis?" quipped a friend of mine -- and, indeed, what better evidence of underprofessionalism than a scientist who becomes nauseated at the mere hint of a theory that differs from hers? But this woman had artfully framed her outrage. Her claim of "bias" was intended not simply to discredit the male who had asked whether there may be substantive differences between men and women, but to define the permissible terms of discussion.
The end:
Unfortunately, the problem President Summers addressed will persist despite the attempts to silence him. No one doubts that women seeking careers in science face greater challenges than those in other academic and research fields. At a recent forum of Harvard graduate students, a succession of budding female scientists expressed their anxieties about having chosen careers that will conflict, more than most, with their no less strong desires to raise and nurture a family. More than one young woman present felt that a job with reduced pressure during her childbearing years might better suit her needs than competition at the very highest levels. The good news is that most of the young women acknowledged that their dilemma was one of choice rather than a product of discrimination against them.

The very notion of "underrepresentation," based as it is on the implicit goal of numerical parity, greatly prejudices our ability to understand why women make the choices that they do. If women gravitate to the hard sciences less than to other fields, we ought to grant them the intelligence of sentient creatures, recognizing the potential loneliness of such choices while trying to understand why groups and individuals act as they do. It is not President Summers who owes women an apology; it is the complainers and agitators who owe both him and all of us an apology for trying to shut down discussion of an "inequality" that is not likely to disappear.
I've been party to discussions that have been "shut down" by such antics. It is a welcome event to see the tables turned on the agitators by a gifted writer like Professor Wisse.

Wednesday, January 19, 2005

NHL Lockout: Hubris, Animosity, and Transaction Costs 

The representatives from the NHL and the NHLPA who met at an O'Hare hotel said they felt they had made some progress and were planning to meet again. Let's face it, there are some serious gains from trade to be made here, but they are not yet getting them. Here is one possible explanation:
Bettman and Goodenow are said to dislike each other and some observers have
expressed concern that the personal animosity between the two men was stalling
negotiations.
There is nothing like animosity to increase transaction costs and negate the gains from trade!

The Rocket's Arbitration Request 

Roger Clemens has set his final offer at $22 million in this year's arbitration showdown. The Astros countered with $13.5 million, an $8.5 million difference. That's huge - all the way around! For pitchers, his final offer is by far the largest one ever made and the Astros' final offer ties the largest offer made by any club to a pitcher. In comparison, the (2003) Braves offered Greg Maddux $13.5 million and Maddux countered with $16 million - the largest pitcher and team offers up until now. In terms of differences, the difference between the offers in the Clemens case is more than 2.8 times the next largest difference for pitchers ($3 million between offers in Eric Gagne's case in 2004).

When economists model an arbitration system, one of the first things they model is how arbitrators make their decisions. For a final-offer arbitration system such as baseball's, arbitrators are assumed to form a "preferred settlement", some outcome that the arbitrators find "optimal" and that they would impose if they could. But since the arbitrators must choose one of the final offers as the binding settlement, it's reasonably assumed that arbitrators choose the final offer that is closest to the preferred settlement.

Should a case go to arbitration, how do arbitrators gather the information to determine this preferred settlement? One way is through an arbitration hearing when both sides make their cases. Another way is just by looking at the final offers. Presumably, both sides have some private information about their cases that the player and team statistics don't reveal. But the final offers may reveal some of this private information to the arbitrators. But if a player's final offer seems unusually large or his team's final offer unusually small, the arbitrator may discredit the final offer. Moreover, such an extreme final offer may make it more likely that the arbitrators will pick the other side's offer. As such, this arbitrator behavior should provide incentive to both sides to set a reasonable final offer.

Is the Rocket's offer unusually large and unreasonable? In 2004, according to the USA Today salary database, the 5 top salaries earned by pitchers averaged $15.96 million and ranged between $17.5 million (Pedro Martinez) and Mike Hampton's $14.625 million. The Big Unit and fellow AARP candidate to Rocket, Randy Johnson, earned $16 million. The Astros' offer, while smaller, is closer to this range.

So what's Clemens doing? He may well be making a reasonable offer. On the other hand, he may be taking a gamble. The differene between the offers makes it more likely, all else equal, that the case will go to arbitration. But, heck, if he doesn't like the outcome of the arbitration process, he can retire (presumably for good). If he does like the outcome, then he'll be back to pitch for the Astros. Shoot, I wish I had the choice to leave umpteen million on the table!

What if the Astros can't afford to pay the Rocket $20 million? Since team finances, at this point in the game, are not allowed to play in the arbitrators' decision, well, tough doo doo. Whatever arbitrators decide (should it go that far), both sides are bound to it. That's a chance that the Astros have to take.

It's good to be the Rocket.

Tuesday, January 18, 2005

Cycles in Conference Dominance 

A recent USA Today column tackled the question, why is AFC dominating the NFC? This year, the AFC won an unprecedented 70% of the inter-conference games with the NFC. Beyond this season’s outcomes, the AFC has won 5 of the last 7 Super Bowls. Strangely, the current trend follows 15 wins out of 16 years by the NFC. Before that, the AFC (and AFL) teams won all but three championships from the 1968-1983 seasons. Beyond the Super Bowl, the Cowboys were the only NFC teams really competitive with the better AFC teams during the 1970s. Aside from Buffalo, the AFC playoff teams would have had a difficult time advancing in the NFC playoffs over 1984-1997. This year, stronger AFC teams missed the playoffs altogether than NFC counterparts who made it to the second round.

Such swings in conference dominance extend beyond the NFL. The NHL experienced similar East (1970s) to West (1980s) to East (late 1980s-mid 1990s) and back to West (late 1990s-) fluctuations. In the NBA, the West handled the East during the late 1970s to late eighties, while the East controlled matters during much of the 1990s. In recent years, the East has fallen to almost minor league status versus the West.

What’s going on? Pure statistical anomaly is possible but does not seem to sync with such drastic swings. The USA Today article poses answers such as the residence of great quarterbacks, defenses, or head coaches. Even if these have legitimacy, they are not really fundamental answers – why would one league come to hold more of the better QBs or coaches?

Here is my stab at an economics-related answer – competition as a spur to performance, or more specifically, the relevant market in which competition matters most. Although AFC and NFC play four inter-league games per year, a team’s performance relative to divisional and conference rivals determines the major markers of success or failure – appearances in the playoffs and playoff wins. If teams in one conference come out with better players or coaches over two or three years (through skill or luck), this initial endowment may develop into a longer-lived advantage for the entire conference as intra-conference competition spurs the chase to keep with the team next door.

While such an effect may seem to be a stretch, I would appeal to common training examples. On an individual basis, training with other players who “stretch” one’s own efforts and abilities enhances performance more than training against lesser rivals. I can attest to this over 25 years of running even with my modest abilities.

One lesson may be that even though competition as a term runs throughout economics, economists may not fully appreciate the value of competition as a spur to performance. This kind of thinking or research is often left to psychologists or other professionals.

Bob Feller -- a blast from the past 

From today's entry in the 2005 edition of the calendar, "This Day in Baseball:"
January 18, 1950

Cleveland Indians righthanded ace Bob Feller takes a $20,000 pay cut at his own request after going 15-14 for the "Tribe" in 1949. He would improve to 16-11 in 1950 and would win 22 games in 1951.
Wow; sounds like Feller was on a mission. I wonder what he thinks of the money in the game today. 15-14 gets you $22 million plus over three years these days -- Kris Benson, Matt Clement, take your pick -- with zero chance of a self-imposed pay cut.

We don't pine for the days of yore at The Sports Economist. But change the name and amount, and the Bob Feller entry would fit this month's spoof in The Atlantic's "Sports Names in the News" (subscription required). A sample:
Basketball legend Herb Fungus was clocked early this morning by the local police driving his Lamborghini at 29 mph in a 30-mph zone and staying in his lane after attending an all-night party. "No weaving, no line crossing, nothing," marveled a police officer at the scene.

Monday, January 17, 2005

NHL and NHLPA to resume talks! 

According to this breaking news, the NHL and the NHLPA will resume talks on Wednesday.

NHLPA president Trevor Linden made the request Monday, asking for a smaller
gathering, according to a source. Linden, NHLPA senior director Ted Saskin and
outside counsel John McCambridge will represent the players while the league
will have Calgary Flames part-owner Harley Hotchkiss, NHL executive
vice-president and chief legal officer Bill Daly and outside counsel Bob
Batterman. A source indicated no proposals would be made from any side, but
rather the meeting is an attempt to kick-start talks.

Any predictions on the outcome? My guess is that many of the players and owners see the handwriting on the empty bank accounts, to mix a metaphor.

Team Finances and Arbitration 

Baseball teams (and most professional sports teams) take measures to keep their financial condition secret. The rules that govern baseball's arbitration system, defined in Article VI Section F of baseball's collective bargaining agreement (CBA), are a case in point.

If a case reaches a hearing, the CBA directs the arbitrators on the criteria they can consider when rendering a decision. Since players and teams in negotiations will consider what they expect to get in the event they can't reach a settlement, these criteria strongly influence negotiated settlements too. There are 6 criteria:

1. The contribution of the player during the previous season
2. The length and consistency of the player's career
3. The record of the player's previous compensation
4. The performance of the player's club during the previous season
5. Any physical or mental defects the player may have
6. Comparable baseball salaries

One item that is specifically ruled out is team financial condition, including the revenue-generating capability of the club. The arbitrators can look at things that will be correlated with team revenue (team performance, attendance, etc.), but they cannot consider revenues per-se. I've got a paper in revision that looks at this question and my regressions suggest that team-specific revenues do not affect the final offers, at least for players who file for arbitration (which is a subset of the players who are eligible for arbitration).

Ken Burns on Jack Johnson 

Eric McErlain rounds up the reviews of Ken Burns' documentary on Jack Johnson, the heavyweight boxing champion of the early 20th century. Johnson's victory in the 1910 title fight spawned race riots from coast to coast. Writing in the New York Times, Ned Martel puts the film, and Johnson, in context:
The film suffers only in comparison with many other treatments of the tragic failings of the famous. As in the retellings of the private lives of other icons, there are tumultuous domestic disputes, infidelities and scandals. Johnson's eagerness to enjoy his victory to the fullest at times feels a little too similar to those other tales of celebrity misbehavior that were to follow in the 20th century.

But among his firsts, Johnson was a pioneer in focusing the mass media's attention on "the Negro" - as he was called - as an individual. Not that this was always flattering. The ugliest parts of the four hours are the dehumanizing portraits and bigoted screeds that ran in newspapers of that era, this one included.

Johnson's living-well-as-revenge style may now seem commonplace, but it was then startling, even threatening. Not only was his athletic achievement upsetting to whites, but his consorting with white women earned him further enmity, even within his own race.
TV worth watching, indeed, tonight at 9pm.

Sunday, January 16, 2005

"A cattle market masquerading as a football club" 

KSK Beveren, a team in Belgium's first division, is not your typical football club. Its purpose is not to win games per se, but to make a profit by developing players and selling them. Hence the description quoted in the title to this post, taken from Gabriele Marcotti's article in The Times.
The Belgian first division side seems to exist for no other reason than to serve as a middle-man for African footballing talent. They make no secret of it and, in fact, are proud of the efficient system they have set up, which has resulted in a situation where 16 of their 21 first-team players hail from Ivory Coast. Most are very young and most will be sent home if they fail to find a buyer after a year or two. It’s a bit like those fancy pet stores where cats and dogs are showcased for a fixed period of time and then, if they go unsold, are dispatched back to whatever pound or shelter they came from.

The Beveren "system" has produced dividends for Jean-Marc Guillou, its architect, a close friend of Arsène Wenger and former manager of ASEC Abidjan, perennial Ivory Coast champions. A few years ago Guillou realised that, while more or less honest agents had been trying to bring African footballers to Europe for decades, there was no formalised structure in place. And such a structure could be immensely lucrative.

So he put together an investment syndicate called Goal and invested £1 million to take control of Beveren, who were close to bankruptcy. He also pumped money into academies back in Ivory Coast and began moving players across wholesale. In economic terms, you could say he is vertically integrated, like the Flemish diamond tycoons of old. He owns the "mines" that dig out the players, the "workshops" that polish and cut them into finished products and the "shops" that showcase them to the wealthy buyers. In the past six months, the set-up has yielded a cool £4 million from the sale of only three players: Gilles Yapi Yapo, the winger, to Nantes, Yaya Touré (Kolo’s younger brother), the midfield player, to Metalurg Donetsk and Emanuel Eboué, the defender, to Arsenal.

"Beveren were a club on the verge of dying," Laurent Denuit, football correspondent for La Dernière Heure, said. "If Guillou hadn’t come, they would have died. He was looking for a European club to develop his business, a club where he could put his (African) players. Thus the scenario has been the same for the last few years. Beveren sell their best players and they are instantly replaced by new ones (from Ivory Coast)."
Shrewd fellow, that Guillou. His next project is a training center in Thailand.

Increased Academic Standards 

The Orlando Sentinel has this article (free registration required) about the new NCAA legislation that gives it the power to take scholarships away from Division 1 teams that do not remain academically eligible. One other bit of legislation that the NCAA passed was the 40-60-80 rule. Under this rule, athletes must have earned 40% of their credits towards graduation by the end of their second year, 60% by the end of their third year, and 80% at the end of their fourth year (up from 25%, 50%, and 75%). Incentives matter and when incentives change, decisions change too:
With the 40-60-80 rule, Mooney said he has heard anecdotal evidence that more junior-college recruits increasingly are looking to transfer to Division II schools instead of Division I schools, because the continuing-eligibility standards will not be as stringent in Division II.
The marginal athletes (in the economic meaning of the term) are now looking more closely at their next-best alternatives. I've heard that some D1 schools were caught off-guard by the high cut-off rate (no more than 10% of scholarships can be lost in any one program - many schools apparently thought it would be less than 10%). D2 schools are also going to feel the effects... and they had no vote in the matter.

Red Sox memorabilia 

Want Johnny Damon's autograph on a baseball? The going rate is $175, and you have to supply the ball. Breaking the curse had historic significance. But Johnny Pesky's sig can be had for $10, which suggests to me that the value of a Damon-signed ball is unlikely to appreciate over time.

NHL Players Advised to Play in Europe 

Bob Goodenow, Executive Director of the NHL Players' Association, has advised the players that he expects the lockout to last well into next year and that the players should sign contracts to play in Europe "immediately".
In part, this could be a bargaining strategy. The owners have announced that they will make one more offer in the next week to try saving what little is left of the season. Perhaps the NHLPA, by telling the players to sign in Europe, is hoping their announcement will signal the players' willingness to stay off the NHL ice for at least another year. If the NHLPA can convince the owners that playing in Europe is a credible threat, maybe the owners will make a better offer this week.

Or perhaps the NHLPA is simply being realistic.

When I went to Tradesports to see what bettors think the odds are of having any NHL games this season, here's what I found:
No matches found for "NHL"
which shows interest in the NHL is so low that there aren't even bets about when the lockout will end. This shouldn't surprise me [see here for my most recent discussion of the lockout and here for what I think the NHL has to do to increase its marketability].

Saturday, January 15, 2005

It's Arbitration Time 

It's arbitration time again in baseball, a time when some baseball players and their teams negotiate with one another under the threat of having a third party render a binding decision if a dispute occurs.

The baseball player's labor market is often thought of as consisting of three tiers, tiers determined by the bargaining status of players. First, there are the reserved players, players with less than 3 years of major league service who are subject to the reserve clause, meaning they can only bargain with their current teams. Second, there are the arbitration eligibles, players with between 3 and 6 years of major league service who are subject to the reserve clause but who can elect to go through the arbitration process. The arbitration eligibles also contain some players called "super two's". These players have only amassed two years of major league service, but they amassed at least 86 days of service during the previous season and rank in the top 17% of service of all such players. Third, we have the free agents, players with more than 6 years of major league service who are no longer subject to the reserve clause.

BTW, "major league service" is defined in Article XXI Section A of the Major League Baseball Collective Bargaining Agreement. A player has to amass 172 days of service to be credited with a year of service. To be credited with a day of service, the player has to be on a team's active roster.

Most of the players who go through arbitration process are the "arbitration eligbles", but sometimes we see players eligible for free agency go through the process as well. During the offseason, teams who have players who have filed for free agency must offer those players arbitration by a certain date or they lose the right to bargain with their free agents until the following May. For all practical purposes, this means that the team and the free agent will part ways. When teams offer their free agents arbitration, they have to weigh the benefits of doing so to the costs, one of those costs being the risk that the free agent may actually accept the offer of arbitration. If this is the case, then the team is obligated to go through the arbitration process with the player. During this past offseason, Roger Clemens is one free agent who was offered arbitration and took this offer. He officially filed for arbitration last week.

If a case goes to arbitration, then both the player and his team go to what amounts to a hearing where they present their "final offers" to a panel of arbitrators (3 of them) and each side presents a case to the panel. Within 24 hours, the panel chooses one of the two offers as the binding settlement. This type of arbitration is frequently referred to as Final Offer Arbitration. In contrast, the National Hockey League (if it ever gets going again!!!) uses a form of arbitration referred to as "Conventional Arbitration" where arbitrators are not constrained to choose one of the "final offers".

These so-called final offers are not really final at all. They are exchanged in mid-to-late January of each year but the arbitration hearings may not occur until the mid-to-late part of February. During this time, the player and the team can continue to hammer away in negotiations. But none of the offers that are exchanged during these negotiations are admissible as evidence in an arbitration hearing. In any case, of all the players who file for arbitration, only about 15-20% of the cases actually end in dispute.

Teams aren't big fans of arbitration for two reasons. First, in the hearing, the player tries to make a case as to why he should be paid what he is asking. The team, on the other hand, essentially tries to minimize the player's contribution in order to make a case as to why the team's offer should be chosen. This can lead to some bad feelings. Second, the way the arbitration rules are set up, the arbitrator can compare the two final offers to the salaries that "comparable players" are making. So when some team, for example, signs a free agent shortstop to a lucrative contract, the terms of that contract make their way into the arbitration system.

In my next post, I'll write about the arbitral criteria: the sorts of things that arbitrators can and cannot consider when rendering a decision.

Friday, January 14, 2005

Steroid Use and MLB Policy:
the prisoners' dilemma 

Major League Baseball owners and the MLB Players' Association have reached an agreement that there will be more, and more random, testing for steroid use, and that the penalties for steroid use will be more severe than they have been in the past, though still not as severe as they are for minor leaguers.

I am having trouble figuring out who was (or should have been) on what side of this negotiation. Here are my assumptions:
  • Players on steroids hit the ball harder and farther, which generates more offence and more demand for tickets, viewership, etc., ceteris paribus.
  • Players on steroids have a higher probability of developing medical and health issues in the future.

If these assumptions are correct, I should think the owners would have favoured steroid use (by the players), and the players would have resisted it. And if this is correct, what had been happening was that steroid use was a typical prisoners' dilemma game. JC at Sabernomics says pretty much the same thing, but much more elegantly, without invoking the prisoners' dilemma model.

In this instance, the players would be enticed by the owners to take steroids; the enticement would be in the form of incentive clauses, bonuses for HR or SLG milestones, etc. Each player would have an incentive to respond to those bonuses.

As a group, the players would be better off not taking steroids to out-compete each other, but they cannot just say, "Let's all stop taking steroids." They need an enforcer to create absolute disincentives for the taking of steroids, and that's what this new agreement provides.

One player interviewed on a local sports-talk radio station said he doubted the owners would have pushed a steroid ban had it not been for all the negative publicity in the past few months. Possibly that negative publicity means the marginal revenue product of steroids is expected to diminish. If so, the owners are more willing now than they used to be to become the enforcers for a player agreement not to use steroids.

Yes, individual players will still try to find ways around the ban; there are always those who try to find ways to move off-diagonal in the prisoners' dilemma pay-off matrix. But for the most part, this ban will likely be welcomed by players.

One friend who knows someone who knows someone.... told me that, in actuality, the players never were particularly opposed to a ban on steroids. Their primary opposition to the league's drug policy was because they wanted the freedom to continue use of recreational drugs (especially marijuana).

The problem with my analysis is that if it is correct, players' associations in all sports ought to be negotiating for steroid bans, and it is not clear they are. Why not?


Gary Williams is pissed 

Why? Because the ACC basketball schedule is driven by TV ratings, which means that all other teams' interests take a back seat to Duke vs. North Carolina.
"The league has been set up for Carolina and Duke since that became the featured game," Williams said. "All the schedules are off of those two games and set up for television. CBS, ABC, ESPN pick the games for ratings and what's left goes to Fox. We've been the third team picked and that's why we play every Sunday night. We play one Saturday (ACC) home game in January and February and that's not fair."
Williams has at least one ally in Clemson's Oliver Purnell.
Purnell said Clemson shouldn't open with Duke four years running.

"It's a tough opener," Purnell said of the 62-54 loss to Duke at Cameron. What's worse, in the new unbalanced schedule this season, Duke doesn't go to Clemson.

"Let's face it, we don't want to open with the best team in the league every year," Purnell said. "That's the bottom line. I want my AD to take this to the AD level and talk about it and consider moving it around."
These quotes are taken from an interesting column by ESPN's Andy Katz, which provides a nice account of how the ACC markets its product to the lords of sports television.

League television revenue is maximized by putting Duke in the spotlight, and both Clemson and Maryland benefit from taking their share of it. But the TV revenue comes at a price. A widespread perception that the integrity of the competition is sacrificed for "showtime" will decrease interest in the league in the long run.

Profits and Franchise Value 

Does this quote from Forbes make sense to you? Do you believe in the efficient market(s) hypothesis?

By Forbes calculations (see: "NFL Team Valuations"), the Patriots' enterprise value, now worth an estimated $861 million, grew 200% between 1998 and 2003--more than any team in the league. Yet the Pats lagged the league average in profitability (in the sense of earnings before interest, taxes, depreciation and amortization, all divided by enterprise value [emphasis added]) in both years it won the Super Bowl.

"Going sideways year to year is more than made up for in capital appreciation [of the franchise], presuming the owners have enough capital to pay their rent," says David Carter of The Sports Business Group, a marketing consultancy. "And most of those folks aren't pushing shopping carts."
Read the above quote carefully. A team wins the Super Bowl, its profits don't go up, but its franchise value triples? Typically in the Capital Asset Pricing Model (CAP-M), and using the concept of net present value, the franchise value should reflect expected future profits. Under this model, if profits (including media contracts, ancillary income, etc.) are expected to remain flat over time [move "sideways"], there is no reason to expect franchise values to increase, much less triple.

Now look at the portion of the quotation that I emphasized: "divided by enterprise value." What the financial data really show is that the rate of return on owners' equity did not change very much over time; that result is exactly what one would expect in an efficient capital market if nominal interest rates also did not change very much over that same time period. Profits went up and so did franchise values, commensurately.

The other interesting tidbit from this article is that the Patriots "lagged the league average" rate of return on net worth over this same period. This one puzzles me a bit. If the Patriots are not expected to continue winning so much in perpetuity, then markets should expect that their profits (adjusted for inflation) are temporarily high right now while they are winning and will fall in dollar terms in the future. This expectation should lead to a lower net present value and hence a lower franchise value. If anything, when profits are transitorily high, the rate of return on franchise value should be higher than average.

Does this mean the Patriots are under-valued? Or does it simply reflect the wide margin for error in public estimates of profits and franchise values? My guess is that it is more likely the latter.

Thursday, January 13, 2005

Option Value in the Beltran Deal 

First things first. Thanks to Skip Sauer for the invitation to contribute to the Sports Economist Blog. Skip has done a great job of blending sports commentary with economic analysis in just the right mix. As a beginner to the blogging scene, I hope I can maintain the standards of this site for lively but insightful analysis.

I grew up in Texas and follow the Rangers and Astros closely, so the recent discussion here of the Carlos Beltran saga stirred my interest. The size of the Beltran-Boras salary demand may have been a deal killer in itself. However, their demand for a no trade clause, may have thrown sand in already grinding gears.

Most obviously, a no trade clause saps some of the decision rights from the club. As Skip noted in "Why did the Astros lose Beltran," a no trade essentially provides the player protection on where he may end up if the club starts losing. As such, it is really an option. One can speculate with an option, but as in the Beltran case, options can be used to transfer risk. In this situation, Beltran-Boras sought to transfer risk to the club by securing control of his trade or sale should the Astros perform poorly -- essentially a "put" option. As the option provider, the Astros "write" the option and take additional risk because they have limited their future trading choices.

All options that grant valuable rights contain economic value. The option buyer pays the option writer, so the no trade clause should lower the salary that a team would pay Beltran. In finance, an option's value (premium) is determined by the interaction of the length of the option's validity, the value and volatility of the underlying asset, and the conditions under which the option may be used. The value of the underlying asset is a key value that is clear and common to both parties.

The same principles are at work in the no trade clause, but now it is the club's performance that plays the role of the underlying asset. Here's where it gets tricky in the sports case. Unlike the finance case, the value of this underlying asset is not transparent nor is it necessarily the same for the option buyer and provider. For the buyer of the option, Beltran, the key value is the mental price tag that he would attach to poor performance. Suppose the Astros' losing imposed $12 million in negative feelings on him (apx. 10% of the contract value). In a simplified case, if Beltran thought that winning and losing were a 50-50 proposition, the option would have up to $6 million in value to him (50% x $12 million). The underlying value to the Astros may differ widely from Beltran's own personal valuation of losing. For them, the key value to consider is how much the restriction might cost them in case they need to trade or sell Beltran. As the Rangers found out in the Alex Rodriguez case, trading a player who may limit the bidders to one or two teams may involve substantial expense.

This may help explain why no-trade options create negotiation difficulties. There is also the matter of ownership-management slowly ceding decision rights to agents, but that's another post for another day.

"Pulling a hamstring to prop up sports teams" 

In the Seattle Times, Bruce Ramsey describes the process of subsidizing one sports stadium after another, and how it hits the public purse.
The citizens of King County voted no on Safeco Field, narrowly, the one time they were asked about it. The citizens of Washington voted yes on Qwest Field, narrowly, after football interests, principally Paul Allen, spent $6.3 million to enchant them.

Two stadium elections: The first was ignored and the second bought. But at least we had them. At least we were asked before being made to pay.
Sound familiar?

And we do pay. In King County, we pay an extra 0.5 percent on every restaurant meal, bumping the rate to 9.3; an extra 2 percent every time we rent a car or truck; and 2 percent on hotel and motel bills. We pay taxes on baseball until 2018 and on football until 2020.

Basketball was supposed to be different. The Coliseum was to be rebuilt with revenues. The construction debt of $74.5 million has been whittled down to $58 million, but now the Sonics say they cannot get to zero. Why? The luxury suites at Safeco and Qwest, which were funded by the public, have undercut the market for the luxury suites at the Key Arena. If commercial baseball and commercial football have a source of free public capital, commercial basketball must have it, too.
So what's next? A proposal to make these tax levies permanent. Does that sound loony to you, sports fans?
A decade ago, the need for a baseball stadium was declared by the Legislature to be a public emergency. That was crazy, but the Washington Supreme Court went along with it as a one-time thing. A permanent tax makes it routine.
A routine, permanent state of craziness. One can chalk it up to "just government," an equilibrium phenomenon, but it is more than that, as I've stated here many times before. The root of these subsidies, and the taxes that finance them, is the monopoly structure of North American professional sport. Ramsey's piece describes the consequences for a city about as well as is feasible in a newspaper column.

Wednesday, January 12, 2005

On the optimal number of co-bloggers 

Here is Ben Muse, remarking on the addition of co-bloggers to The Sports Economist:
Additional contributors add value for readers by increasing variety and limiting the potential for long gaps in posting. Co-contributors also reduce the burden on individual bloggers.

I find, as a reader, that there are limits to the benefits from more contributors. I tend to value the personality of the bloggers, expressed through the organization and layout of the blog, the choice of topics, and references in passing to the blogger's activities and interests.
There is always a tradeoff, and the tradeoff Ben describes is one that I've considered carefully. Diversity and variety are good things, but in asking Brian, John, and Phil to contribute to the blog, I deliberately chose economists who would maintain the character of The Sports Economist while expanding its voice.

Ben also states that "Sauer has chosen well, and a good thing is going to get even better." That's my hope. We'll see what a stable of four observers of the sports world, all with economics embedded in their bones, can do with this thing. I'm looking forward to the ride.

Welcome to Brian Goff 

Brian Goff, Distinguished University Professor of Economics at Western Kentucky, has joined The Sports Economist. Brian is an "economist's economist," and has a keen interest in the intersection of sports and economics (just check out his vita at the link above). Welcome, Brian!

New NCAA Restrictions 

The NCAA has approved a preliminary new rule that would penalize teams when their players do not stay academically eligible. Basically, the new rules stipulate that each men's and women's team competing in Division I will be judged upon two broad criteria: 1. an Academic Performance Rate (APR) (to measure how athletes are doing in the short run) and 2. a Graduation Success Rate (GSR) (to measure how athletes are doing in the long run). Although the formulas that determine these rates have not been made fully public, USA Today has the following description in this article:

• Academic Progress Rate: Every sports team will establish an annual APR. Individual scholarship athletes will account for two points per school term, earning one for remaining academically eligible for competition and one for remaining at the school or graduating.

• New graduation rate: The NCAA will compile a new graduation rate, different and more accurate than the rate now computed by the federal government. Unlike the federal rate, it will take transfer athletes into account, not penalizing those who move to another school or into a professional draft if they're academically eligible at the time they leave.


Schools will find out later this month or early next month how they fared under the new guidelines and they will start feeling penalties next academic year. According to the USA Today article, the penalties are:

• Penalties are progressive. A first failure to meet the measures will result in a public warning. A second will subject a team to scholarship and/or recruiting restrictions. A third failure will subject the team to a ban on preseason and postseason competition. A fourth failure will subject the school's athletic program to restricted membership in the NCAA, barring all its teams from postseason competition.

Further failures could cause the team to lose its NCAA membership status - in essence, a death penalty. What would you like for your last meal and where would you like to be buried?

The new rules, indeed any stiffening of the academic rules, favor the schools that already have a good academic reputation and gives them a competitive advantage on the playing field (and in the recruiting wars). In addition, schools with a high demand for sports are more likely to be hurt by the restrictions because of the relatively high rent they obtain from recruiting and keeping an academically risky student (relative to low demand schools).

One thing that is interesting is the new rule regarding how transfer students and players who leave for professional sports are statistically treated. In the past, an athlete who left the school in good academic standing was treated just like an athlete who dropped out when it came to calculating graduation statistics. Now, as long as players leave in good academic standing, their decision to leave does not affect the school’s graduation rate. I’ve looked at several articles on this issue today and I couldn’t find any mention of how these sorts of players affect the APR. In any case, the new way of calculating a school’s graduation rate helps out the schools which frequently have players leave their programs for professional opportunity.

For more information and some other links, see this article at HoyaSaxa.com.

It's the opportunity cost, stupid 

Two good quotes from Stanford's Roger Noll, in Patt Morrison's column in the LA Times on politics and stadium subsidies:
Paul Tagliabue, the NFL commissioner, campaigned for San Francisco's 1997 stadium bond measure by protesting, "This is not a stadium project — it's economic development." But as Noll points out, luring sports teams with public money in the expectation of big benefits is a sucker's game. With, say, $200 million — about two-thirds of what the public put up for Camden Yards in Baltimore — "you could go out and build an industrial park and generate 10 to 100 times as much taxes and jobs."
But nevertheless it pays for the politicians to kick in the cash for stadiums:
Politicians do it because "it's good politics." Very few people, Noll argues, vote against someone who spends public money for a sports team, but a lot — 5% or 10% — will vote against the politician who refuses to. There's a wonderful quote from the mayor of a town in suburban Phoenix. He said, 'We never built a new stadium without asking the citizens. If they tell us they want it, we build it. If they tell us they don't want it, we go ahead and build it anyway.' "
Read it again, and reflect.

Beltran negotiations, blow by blow 

Richard Justice gives Boras and McLane's views of the Beltran negotiations. Here's the first bit:
What bothers Drayton McLane even now is that there were never any real negotiations.

Only in the final hour or so before Saturday's 11 p.m. deadline did he and Scott Boras have a serious give-and-take about Carlos Beltran.

McLane now wonders if Beltran ever intended to sign with the Astros. He wonders if he was used as leverage to get Beltran a deal elsewhere.

Boras emphatically denies this. He telephoned Monday afternoon to say the deal fell apart because McLane refused to give Beltran the same no-trade clause he had given Andy Pettitte.

"We'd agreed on all the economic issues," Boras said. "Drayton stepped up big-time."
I don't see that Beltran got a better deal (in net income) from the Mets, and all indications are that he had no desire to leave Houston. If that is true, why did he leave? At the eleventh hour, the no trade clause component was fumbled by the Astros. Remember it was Astros sources who broke the news on the no trade issue the night that negotiations failed. This is not just Boras blowing smoke.

My reading of the information in Justice's article is that it's "blame Boras time" at McLane's place. This doesn't wash. The situation can be viewed as quite the reverse of how McLane is spinning it. The facts are that McLane low-balled Beltran initially, and competition from the Mets was required to get the Astros' offer up to market value. Read the article and see what you think. Thanks to The Fix at the WSJ ($) for the link.

Tuesday, January 11, 2005

Why Does It Matter How Wealthy They Are? 

I was delighted when Skip Sauer invited Phil Miller at Market Power and me to join him here at The Sports Economist blog. I have a high regard for both of them and for their work. Also, this blog has been one of my favourites, ever since I came across it nearly a year ago.

For my first posting, I would like to raise the issue of the economics of greed and envy. I've selected this topic because I have found myself quite uncomfortable with some of the support I have received over the years when challenging gubmnt subsidies for professional sports teams. My arguments have always been along the lines of pointing out that the local multipliers for spending on professional sports are small (or negative, as Dennis Coates and Brad Humphreys have found; see here for a good summary of their work). I also argued here that the positive externalities are small and that people supporting the subsidies often overlook the negative externalities of having a professional sports team in town.

What concerns me is one reaction I get when I appear on talk-shows, discuss the topic in sports bars, or that I often see in the mainstream media (MSM). People are jealous of the wealth of the owners and players at the major league levels. They say, "Why should we support those rich guys, making millions of dollars a year? The players should take a pay cut, and the owners should build their own stadia, like in the old days."

Peter Mork comes perilously close to saying the same thing, writing in his recent posting about the San Diego Chargers:
It always shocks me that millionaire players and billionaire owners feel the need to take money from everyday people to fund their line of work. You would think it would be commonsense that if these stadiums were such great deals, they could finance them on their own and wouldn't need taxpayers subsidies.
When I face such remarks on talk shows, I try to let them slide and readdress the topic from a different perspective. And I understand that Peter Mork's primary point was that the voters of San Diego are much more likely to support a winning team than a losing team.

The question of whether taxpayers should support professional sports is a valid one. If it is efficient to support them, if there is a net social gain to supporting them, then it should not matter how well-off the owners and players are, unless we openly acknowledge that we would be happy to sacrifice some economic efficiency just to keep rich franchise owners and highly paid players from becoming richer.

Of course, if you want to allow interdependent utility functions (see here and here) to dominate in our policy choices, let me tell you about the weights I'd like attached to the utility functions of some of the people I do and do not like....

Monday, January 10, 2005

Switching Divisions 

Officials of NCAA Division II college programs were recently worried about having too many members. Now they are worried that too many are leaving D2. Here is an article from NCAA.org describing the problem.

From 1994 to 1999, the division netted 51 members (compared to 7 for D1 and 70 for D3). But, from 2000 to 2004, D2 membership fell by 5 schools while D1 and D3 membership increased by 16 and 11 respectively. My school's conference, the North Central Conference, was hit especially hard when South Dakota State, North Dakota State, and Northern Colorado left D2 to join D1 and my alma mater, Morningside College, left D2 to join (appropriately) the NAIA.

To become D1, each school must sponsor at least 14 sports (either 7 for men and 7 for women or 6 for men and 8 for women). To be in D2, each school must sponsor 8 sports (4 for each gender). There is also a larger maximum number of grants in aid that can be awarded in D1 schools in football. All else equal, it costs more to be in D1.

But the revenues are higher as well. There is the D1 men's and women's basketball tournaments. D1AA schools (the division in which many of the D2 programs are playing football) can schedule football games against D1 counterparts and get their sacrificial lamb payments. Since there are no subdivisions within any of the other D1 sports, these programs can schedule several basketball games against big-name programs in women's and men's basketball as well. One can also see a handful of other D1AA football contests on television. Don't forget donations to the athletic department and to the school's general fund. That's an important source of revenue from collegiate sports.

But the exposure of D2 sports is much more limited. Outside of the D2 football championship game, it's hard to find much on the television. Consequently, the revenue potential in D2 is also limited.

To combat this, D2 officials are now looking to get more television exposure of D2 programs (which will also mean more television revenue). According to David Brunk, the chair of the NCAA D2 Membership Committee:

"Through an ESPN, an ESPN U or a CSTV (Phil - College Sports TV, a new cable/satellite channel in the US), we can show what we have, which is an outstanding product," he said. "Our charge as a subcommittee is to get these broadcast entities to see the value of televising our events and telling the stories about our outstanding student-athletes."

To that end, the subcommittee has been exploring what can be done to get more television exposure for Division II, both through the coverage of championships and through posting more Division II football and basketball scores on the update "scroll" at the bottom of the screen.

Brunk said he also is pleased with recent changes that have encouraged competition between Divisions I and II basketball teams.

It will be interesting to see how this shakes out. Schools have left D2 because their opportunity cost of staying in got too large. Now the powers that be in the Division want to try to alter the incentives to keep members in.

New Blogger to the Sports Economist 

I am honored to have been asked by Skip to join The Sports Economist Blog along with The Econoclast, John Palmer. I have been blogging since October over at Market Power and have only been reading blogs since last June when a friend of mine told me about The Sports Economist. Yup. It's the first blog I ever read. I've been checking in fairly frequently ever since and made it required reading for my students in Sports Economics. I'll continue posting over at Market Power, but most of my sports-econ related stuff is going to migrate over here. I hope you find my posts interesting.

Why did the Astros lose Beltran? 

The Houston Chronicle is full of stories from players and the Hispanic community stating the owner Drayton McLane "did all he could" to get Carlos Beltran to sign with the Astros. David Pinto implies Boras sent McLane on a fools' errand to raise the price fetched from the Mets.

My take is different, and is based on this report in the Chronicle: "Sources: McLane turned down Beltran's demand for no-trade clause." Why might this move have been "fatal," as this article suggests? My view is that Beltran would have stayed in Houston had he been convinced that McLane was committed to winning. McLane's final monetary offer was at a significant discount to the Mets, though the tax differential would have reduced or eliminated the gap in net income to Beltran. Beltran's quid pro quo was the no trade clause, and I don't blame him or Boras for requesting it.

A no trade clause is worth little to a player if the team is winning. It has value to a player if the team is losing and they need to restructure the roster. Beltran's request can thus be viewed as a request from McLane for a commitment to win, and should that commitment not be there, to allow Carlos some choice among teams in a future trade. In effect, Carlos was saying to Drayton, "I want to win, badly. Do you?" Unfortunately for Houston fans, Drayton's answer was negative.

Bottom line: Houston baseball ownership did not step up to the plate, as reported. Again (remember the Nolan Ryan affair).

Tom Kirkendall has a different take, and he may be right. But McLane has just conceded the perch of the Central division to the Cardinals for the next few years. It might be the right thing to do financially, but it is not very sporting. The conclusion of the Bagwell and Biggio era looks bleak to me.

Blog expansion 

Phil Miller and John Palmer will be posting, along with yours truly, to The Sports Economist. Phil is assistant professor of economics at Minnesota State University, Mankato. John is professor of economics at the University of Western Ontario.

I was impressed by their economic research before I got to know them better through their blogs at Market Power and The Econoclast. Both teach courses in the Economics of Sports, and will help make this blog a more informative and entertaining site for students and others.

Saturday, January 08, 2005

Talent evaluation and projection 

Two baseball scouts and two statheads enter the ring for a tag team affair, with Baseball America's Gary Schwarz serving as the referee. Interesting stuff. Organizations that can coordinate the contributions of these two necessary inputs are likely to gain a significant edge on the competition. Ultimately, successful scouts will recognize that analytical work has its place in talent evaluation, and not reflexively object to its use.

Footnote: I may comment some more after my mind clears from interviewing two dozen extremely smart young economists at the AEA meetings in Philadelphia. Many thanks to The Finance Professor (Jim Mahar) for the link.

Revenue sharing in the NFL 

Here's a Washington Post story worth checking out for the facts: NFL's Economic Model Shows Signs of Strain.

Thursday, January 06, 2005

Coordinated free throw defense 

Would you fire this man? Here's Daniel Engber, in Slate:
Mavericks opponents have shot 8 percent below the league average since adopting my strategy. More important, Dallas has yet to lose a game.
The strategy - coordinated free throw defense (by crowds) - would be cheap if the long run effect were half that.

I'd like to see an analysis of the effects of crowd behavior on opponents' free throw shooting at Wake and Duke. This could be easily achieved with a bit of institutional knowledge (when were the distractions coordinated to take advantage of the science that Engber cites in his piece?) and statistical analysis. Perhaps Mavs owner Mark Cuban has already done that. Or maybe Stern got to him, who knows.

Two reasons to kill the FCC 

Here's FCC chairman Michael Powell, in a candid moment, as quoted in Wired:
"We tried to kill cable. We tried to kill long-distance. When (MCI founder) Bill McGowan starting stringing out microwave towers that threatened AT&T, the FCC tried to stop him. The FCC tried to kill cable because it was going to threaten broadcasting."
Wired writer Adam L. Penenberg isn't sure the evidence is completely damning, and concludes that getting the FCC out of the broadcast content business is enough. But the FCC's activity in that arena is a mere nuisance.

The FCC has been, and will continue to be, a bastion which retards progress in communications. If you like progress, you'd prefer to eliminate the entire agency.

Caveat emptor 

Beware indeed: fellow economists, including former Clemson students Rodney Paul and Andy Weinbach, give "five betting tips for the NFL playoffs" at Forbes.com. Nice to see the boys (and blogger Jim Mahar) sharing media space with Steve Levitt, but my advice is to keep yer money in yer wallet, and enjoy the show.

Celebrity and hubris 

From Forbes.com:
Everyone knows about the Sports Illustrated cover jinx. Like the time Ted Williams made a 1996 cover, only to trip over his dog and break his hip. Does the same misfortune happen to executives who become celebrities? Anecdotally, to be sure.

...Now, two economists--Ulrike Malmendier of Stanford Business School and Geoffrey Tate of Wharton--have gone beyond anecdotes. As specialists in "behavioral corporate finance," they studied the performance of 566 chief executives from 1975 to 2002. Half appeared prominently in magazines or got major business awards. The other half didn't have such high profiles, but had past company performances remarkably similar to the ones who did.

Guess what? Celebrity leads to hubris--and lower returns for shareholders. Malmendier and Tate will release the results of their study in Philadelphia tomorrow at the annual meeting of the American Economic Association. They don't name names, but here's some of what they've found:

--Return on assets at companies with "celebrity" executives deteriorated steadily for at least three years after a big award, while those with lower profiles did consistently better than the superstars.

--Award winners write more books than non-winners--autobiographies, collections of self-help advice and homespun philosophy. Ghost-written or not, they're distractions from the bottom line.

--The more awards a chief executive wins, the more boards he joins, leaving less time for his own directors.

--Superstars get bigger pay increases. Total compensation, including stock and options, rose an average 39% the year after the award, compared with an average 18% gain for the media-ignored.
It would be anecdotal, but I could give you a name or two (Fiorina and Lay), having owned the shares and watched the celebrity phenomenon take place. Not long thereafter, the stocks went into the tank.

Wednesday, January 05, 2005

Coach Debreu 

Gerard Debreu, the Nobel Prize winning economist responsible for "the existence proof" of a competitive equilibrium, died in Paris on Dec. 31. This obituary from UC Berkeley covers the standard ground, but also offers some interesting personal details about the man. Keeping with this blog's sporting theme, here's a bit on Debreu the Football Coach:
It was a more playful Debreu that was seen on campus in 1983, just before he won the Nobel, when he enthusiastically volunteered to coach the first ever "Little Big Game" between economics graduate students from UC Berkeley and Stanford – despite knowing nothing about American football. Debreu coached the UC Berkeley team while [Kenneth] Arrow coached the Stanford team. The intradepartmental touch-football game became an annual event with the winner awarded a bronzed apple core trophy in honor of Arrow's and Debreu's Nobel Prize-winning theoretical work on the equilibrium (or "core") of an economy.

Derby purse to $2m 

Churchill Downs doubled the size of the Kentucky Derby's purse on Tuesday, increasing the total prize for the first leg of horse racing's Triple Crown to $2 million.

The winner's share of the May 7 race will account for 62 percent of the guaranteed purse, or at least $1.24 million. The purse for the Derby has been $1 million guaranteed since 1996.

"We just felt it was time to increase it to $2 million and show our commitment to what the Derby really is — not only tradition but the purse level," track president Steve Sexton said.
Left unsaid was that the miserly purse (by today's standards for top class races) risked turning the Derby from an American tradition into a relic. The move is overdue.

The bloom is off the rose 

The bankruptcy of Oregon Arena is complete, and Paul Allen has given up control of the Rose Garden to creditors. The Blazers, unable to sell a big chunk of their prime seating (luxury boxes and courtside seats) in recent years, have been unable to generate the rent required to pay off the 1995 facility. Having insurance companies in control of the facility - rather than another arm of Allen's corporate holdings - would not appear to help matters much.

Portland was once a great NBA city. Something has poisoned the well of pro basketball in the US, and the NBA has a tough job on its hands to diagnose and fix the problem.

Tuesday, January 04, 2005

Bring on the cameras 

The ball was a full yard beyond the line, but the goal was not given. Had it been at the other end of Old Trafford, for Manchester United instead of against them, I believe the ref would have called it a goal. Along with millions of other conspiracy theorists.

"Disgrace," "remarkable oversight," "injustice;" those are the words used in this piece in the Times. Although the announcers on FSW did not travel down conspiracy theory lane, their commentary was sharp and brilliant: there is no excuse for the game not to get these decisions right.

Even Ferguson (United's boss) stated that such an error could have been fixed in less time than it takes for a goal kick. Cameras are cheap. Perhaps next season?

Update: Here's a picture, and here's a video clip of the incident.

The financial cost of relegation 

From the Telegraph: "Sunderland, once known as the Bank of England club, are worth a mere £2.6 million, which is less than the annual wage bill for Manchester United defender Rio Ferdinand."

Sunderland were relegated from the Premier League a few season's back. The 2.6 million may be more than Leeds and Coventry fetched when they went through bankruptcy due to the same event. All these clubs have a long history of top flight football in England, and probably wish they were playing in a U.S. style league, where the financial penalty for losing is not so severe.

Sunday, January 02, 2005

Looking back at 2004 

Craig Depken posted his list of the top twenty sports topics in 2004. It's a nice blend of sporting achievements, economic and fiscal implications of sport, and ignominious episodes.

I'd add one thing to Craig's list, and I'd put it at the top. 2004 was the year in which analytical methods became widely recognized as critical to success on the field. Moneyball was published in 2003, and while the thesis was largely (and correctly according to a paper of mine with Jahn Hakes) accepted among people with economic and financial knowledge, it was hotly debated in baseball circles. Then the Boston Red Sox, a team owned and managed by analytical types, broke the curse and won the World Series in 2004. That development was the icing on the cake. Preceding that, in April, Arsenal won England's Premier League under the guidance of "The Professor," Arsene Wenger. The man with a degree in Economics didn't just guide the team to the title, he did it on a budget, he did it by going unbeaten (an unprecedented feat), and did it playing with a style that won applause from all corners of the football world. The championships of the Sox and the Gunners were achievements of historic magnitude. And let's not forget that the year began with Wenger's counterpart in American Football, Bill Belichick winning his second Super Bowl victory in three years with the Patriots. It was a phenomenal year for analytical management in sport.

On the financial side, the mirage of "economic impact" has burdened Greece with debt service that will consume a couple of percent of GDP for the forseeable future. I'd move that above the Cowboys' heist of Arlington, and MLB's fleecing of D.C. in terms of economic significance.

As for individuals, I have never seen a pitching performance as brilliant as Randy Johnson's perfect game against Atlanta, and I'll never forget it. Amazing, jaw-dropping, and ultimately exhilarating. Perfection, indeed, hence it tops my list of individual feats.

Happy New Year, everyone!