Wednesday, June 29, 2005

Switching Divisions, Again 

The NCAA and officials from the remaining D2 schools are worried about the loss of schools in D2. Back in January, I had this post on switching divisions. This past weekend, officials from D2 colleges met in Orlando, Fl. to discuss the exodus. The Chronicle of Higher Education ($$$ req’d) had this to say about the meeting:

Seeking to stop the exodus of colleges and universities from Division II athletics, chancellors and presidents from more than 150 Division II institutions gathered here over the weekend to discuss new revenue opportunities and ways to get more exposure for their neglected athletics programs.

About a dozen Division II colleges have switched to Division I play in the past five years -- the largest decline ever, according to the National Collegiate Athletic Association -- and at least nine of the remaining 281 Division II institutions are considering a transfer.

The NCAA has released this report by Jonathan and Peter Orszag on the finances of D2 with sections on schools that switch Divisions. Using data*** from the 92-93 academic year to the 02-03 academic year, the authors examine various financial indicators of the health of D2 athletic departments and those that switched from D2 to D1. According to this article in the Chronicle of Higher Education ($$$ req'd), the results, so far, haven’t been pretty:

Colleges and universities expecting to increase their athletics revenues by moving from Division II to Division I instead incur shortfalls of about $3-million a year, according to a report scheduled to be released on Saturday at a meeting of Division II chancellors and presidents.

The average shortfall is what remains after subtracting institutional support (which does not include student activity fees) from the “revenues”, support which averaged approximately $2 million per school. The authors also note that when institutional support is excluded from the calculations, no school recognized positive net revenue from the change.

The prestige of becoming a Division I program -- which holds the allure of higher ticket sales, bigger sponsorship deals, and increasing student enrollment -- sometimes blinds institutions to the financial repercussions of the move, said Jonathan M. Orszag, one of the study's authors. Instead, the study found that colleges suffer financially for at least the first five years after they switch to the higher classification.

The report also found that, for every dollar Division II institutions spend on athletics, they get only 20 to 60 cents back in increased revenue.

According to the report, increased student activity fees, a separate revenue classification from “institutional support,” accounted for a large portion of the increased “revenues” at many of the institutions that switched divisions. One can almost hear the line from Dean Wormer in Animal House: “I think we can arrange for a nice little honorarium from the student fund...” .

Most of the increases in expenses come from scholarships (grants in aid), coaches’ salaries, and team travel. Since a D1 program must sponsor more sports than a D2 team, this is not surprising. Grants in aid are an interesting animal because they mask the economic cost of an athlete to a school. Unlike travel expenditures and coaches’ salaries, grants in aid represent money that is largely shifted from one part of a school to another.

What are some of the characteristics of schools that moved? According to the report, schools that switched tended to 1. be larger schools, 2. be public schools, 3. have lower SAT/ACT scores, and 4. have slightly lower acceptance rates.

The authors note several things about why schools moved:

1. A psychological boost from switching divisions.

2. To improve visibility and the public perception of the school.

3. To improve fundraising (there is no evidence that this occurred).

4. To improve legislative appropriations (schools tended to be larger schools and public schools) – one of the people interviewed for the report suggested this was an important reason the person’s school went D1.

Because larger public schools are more likely to seek to switch divisions, I’d be willing to bet #4 is a pretty big item in the decision. The authors also argue that the officials at schools that moved did little financial homework on the financial repercussions of switching divisions. It’s easier to undertake a risky venture without doing your homework when you are being subsidized.

***Statistical note: The data consist of survey data from colleges that either are or were D2 schools during the time period under investigation. Many of the analyses, like those mentioned above, came from analysis of various regression models. The authors note that their data only allowed analysis of 20 schools that switched divisions in at least one sport and the regression results upon which their analyses are based differ across models and many of the statistics are insignificant. So, take care in interpreting the results.

Tuesday, June 28, 2005

A tale from a cartel 

Here's a interesting story via Richard Justice in today's Houston Chronicle:
University of Texas center fielder Drew Stubbs remembers being "a little bit disappointed" when the Astros abruptly pulled out of a deal with him two years ago.

"I would have liked to have played for them," he said. "Maybe I'll get another chance some day."

Not likely.

He'll probably be one of the top five picks in the 2006 draft. He's got such a dazzling set of skills -— speed, power, instincts, smarts -— that some scouts believe he'll be the overall No. 1 choice.

... Stubbs was signed, sealed and delivered for $900,000 when they took him in the third round of the 2003 draft.

Scouts thought he'd be a bargain at that price.

And then Astros owner Drayton McLane got involved.

In a move he may long regret, McLane ordered his baseball people to renege on that $900,000 deal. He told them the Astros could only pay Stubbs $450,000.

"I wouldn't say we reneged," McLane said. "I never approved the deal you're talking about."

His baseball people clearly didn't think his approval would be an issue. Signing Stubbs should have been as routine as signing any other draft choice that year.

How the deal fell apart, how the Astros lost a terrific prospect, isn't the organization's finest hour.

"Please don't mention Drew Stubbs to me," a club source said. "I get sick thinking about the way we handled that."

... The deal fell apart when a representative of commissioner Bud Selig's office telephoned McLane and told him the price for Stubbs was too high. ... Stubbs, McLane was told, should be paid $450,000.
Bonus scales can be fixed through collective bargaining, as with the NBA and NFL. But these shenanigans trace directly to baseball's antitrust exemption. It's a legal cartel, so one can expect the consequences: restrictions on competition that have a purely pecuniary basis, incentives to cheat, and threats of punishment from the cartel coordinator. Fortunately, everything seems to have turned out well for Mr. Stubbs, though I wouldn't mind seeing him in right field at Minute Maid Park.

Sunday, June 26, 2005

Sports books 

Co-blogger John Palmer stuck me with the book tag at The Eclectic Econoclast. I decided to follow through with a twist: I'm limiting my answers to books on Sports. Here are my answers:

1. How many books?
I'd guess I've bought 200 books on Sports alone, and still have half of them. I keep most of the so-so books until the bookshelves need purging, and almost all of the "must-keep-for- future-reference" ones. I give many of the more enjoyable ones a chance at "making the tour."

2. Most recent purchase
National Pastime, by Stefan Szymanski and Andrew Zimbalist
Great book, with a reserved seat on my reference shelf. It's also my most recently read sports book, so in the next category I'll list the book I've got open.

3. Currently reading
Sunday Money: Speed! Lust! Madness! Death! A Hot Lap Around America with Nascar, by Jeff Macgregor
The Nascar juggernaut and its wacky culture, from coast to coast.

4a. Five books that "meant the most"
Among the Thugs, by Bill Buford
Buford traveled with the English hooligans when their lust for violence threatened to destroy European football. A scary book that shook me up and left permanent scars. I lean toward individualist thinking on social matters. But the power of crowds and the apparent irrationality driving them, well illustrated in this book, challenge one's faith in humanity. It moved the needle on my "Adam Smith Dial" away from The Wealth of Nations and towards The Theory of Moral Sentiments.

Fever Pitch, by Nick Hornby
I was baptized an Arsenal fan on my arrival in London in 1973. I was thus naturally drawn to Nick Hornby's book on growing up obsessed with English football and the Gunners. Reading Fever Pitch made me a Hornby fan, and I've enjoyed his subsequent work on the modern "male condition" immensely.

Pay Dirt, by James Quirk and Rodney Fort
The Bible of Sports Economics.

Seabiscuit: An American Legend, by Laura Hillenbrand
Rich in historical detail and compelling drama, beautifully written, a masterpiece. It's the best sports biography ever written (if I may be so bold), reflected by the fact that its reception transcended the genre. There are 601 reviews of this book at Amazon.com, averaging 5 stars. Need I say more?

The Sporting News Baseball Register
"Every Player, Every Stat" says the 1999 edition. Well, I'm a stat-head, and the Register was a must-have prior to baseball-reference and sources of similar data on the internet.


4b. Honorable mention baseball books:
Moneyball:The Art of Winning an Unfair Game, by Michael Lewis
Anyone who reads reads books, likes baseball, and hasn't yet read Moneyball is, well.... are you Joe Morganesque?

This Ain't Brain Surgery: How To Win The Pennant Without Losing Your Mind, by Larry Dierker
I'd guess that most readers aren't aware of this book and that only a few of you have read it. That's a shame. Dierker is a great character, combining raw intelligence and an aptitude for study with humility and humor. Those qualities are amply displayed in this fine book.

Baseball: A History of America's Game, by Benjamin G. Rader
If you don't know baseball history, this readable and authoritative account will cure your affliction.

5. My tags
Eric McErlain at Offwing Opinion, Greg and Michael at The Sports Law Blog, Tom Kirkendall at Houston's Clear Thinkers, and John Perricone at Only Baseball Matters.

You guys have been stuck! And please note: it was a fun trip through the past to think about what went on my list, but I won't be offended if you decline.

Youth movement 

The quote of the day goes to 18-year-old Paula Creamer:
"If I'm a veteran, then goodness."
Creamer trails 15-year-old Michelle Wie and 17-year-old Morgan Tressel by 1 shot going into the final round at the U.S. Women's Open.

Annika Sorenstam is 5 shots back on a course where the rough makes Pinehurst look like child's play.

Sorenstam was last seen in a conference call with Billy Hunter and David Stern, seeking advice on the use of collective bargaining to impose an age limit on LPGA competition.

Saturday, June 25, 2005

Kelo, stadium subsidies, and economic development 

Thursday's Supreme Court decision in the Kelo case triggered a flood of insightful blog commentary. Given that the substance of the decision obviously has an impact on things we've been discussing here, I'm a bit late to the party. But having read the decision and the opinion of legal scholars, I should be better prepared to discuss the connection between Kelo and the building of sports stadia.

Kelo makes it clear that a broad interpretation of the term "public use" remains acceptable to the court in eminent domain proceedings. In particular, "economic development" can be used as a public use rationale for takings. Specifically, it's ok to condemn people's homes for the purpose of building offices & parking lots on land transferred to new owners. That's what happened in Kelo, and it is permissible since jobs and tax revenue will increase as a result.

As readers of this blog well know, the "economic development" claim is a routine ploy in the political jousting over stadium subsidies. What then, does Kelo mean for the stadium subsidy game, and what can we learn from the study of stadium subsidies as to the likely impact of Kelo on takings?

The direct effect of Kelo on stadium finance is minor. Sports stadia have long been recognized as having a public use, along with the transport which enables people to get there. Kelo thus won't lead to an increase in takings for the building of stadia per se. But Kelo does have the potential to expand the scope of these projects. Houston attorney Tom Kirkendall put it this way in an email, "When do you expect the first "Wrigleyville"-type redevelopment project to emerge?" Prior to Kelo, you could condemn land for transport and for the stadium. Now it is clear that neighborhoods adjacent to the stadium are fair game, as long as the case is made that the intended "economic development" is in the public interest.

Although Kelo has only minor implications for stadium finance, the reverse is more interesting. Lessons from the politics of stadium subsidies actually have a bearing on interpreting the decision and the likely effects of the ruling.

The use of an economic development rationale to justify stadium subsidies has a long history. This history has been extensively studied by sports economists. Here is what we know: (i) Every case for a stadium subsidy is accompanied by an "economic impact analysis" showing that investment in the stadium will help develop the local economy. (ii) Scholars view these studies as political propoganda, not as objective analyses. (iii) Objective evidence that such development actually takes place is meager at best - virtually every published study fails to find a significant economic impact from sports stadia.

The economic literature on stadium subsidies is thus very clear: economic development provides no basis for justifying public investment in stadia. Yet peddlers of fantasy under the economic development banner make their living aiding and abetting major league owners in their quest for public handouts. In Kelo, the Supreme Court had the opportunity to ban this tripe from the courtroom in takings cases. But the decision gives these same peddlers the license to aid and abet developers in tearing down neighborhoods.

Justice Kennedy's warning that future economic development claims will be carefully scrutinized strikes me as foolish. Courts do not have the expertise to judge these claims on a case by case basis. Hence, much flim flammery can be expected as the local development boards gear up. And they already have - witness the plans for a marina in Freeport Texas (scroll down), and the new D.C. stadium's environs (where Mayor Williams reportedly "praised the ruling.")

The Kelo case will result in the forceful eviction of homeowners - voluntary exchange is ruled out because the "development board" couldn't meet the valuation residents placed on living in their homes. Absent strategic negotiation (which is apparently not present in the Kelo case), the legitimate case for economic development thus boils down to an externality argument: other property is made more valuable if these people and their property are severed. In a nutshell that's the economic development justification for the taking.

An externality argument that justifies forceful eviction had better be a strong one. Stadium subsidies provide a case study of the strength of the economic development argument: it's weak. All too often the economic development argument is more fanciful than real. Hence it is not a legitimate foundation for government-mandated seizures of property.

Welcome to Stefan Szymanski 

Stefan Szymanski hails from Imperial College in London, hence his presence adds a new vantage point to The Sports Economist. First and foremost though, he's an economist and a scholar, so his contributions will both solidify the base and expand the scope of our endeavor.

The current blog roster knows Stef for his scholarly research. Most notable (to me) in a rather prolific stream, is his fine work analyzing the influence of economic forces on the organization of sport. Blog readers may recognize him as the co-author (with Andrew Zimbalist) of the recent National Pastime: How Americans play Baseball and the Rest of the World Plays Soccer. As one would expect, the book is entertaining, informative, and insightful. Phil Miller's review of National Pastime was posted here at the beginning of June.

Welcome to the blog, Stef!

Friday, June 24, 2005

Sport from the other side of the world 

I approached Skip a few weeks ago asking if I could join this blog which I’ve been following on and off for a few months. It’s a real pleasure and an education to read through the articles posted here, so I hope my contributions don’t pull down the batting average. As a Brit based in London with a sporting preference for rugby, cricket and soccer rather than football, baseball and basketball, my day to day interests are likely to diverge significantly from people based in the US. Team sports in Europe, and in the rest of the world tend to be run a little differently, and these differences are increasingly coming to public attention, as the lengthy correspondence on Malcolm Glazer shows. I thought I’d open up, however, with my own favourite sport, Rugby Union. I don’t think rugby resonates too much with US audiences- although most Americans who like gridiron tend to like the look of it, from my experience. It’s a surprisingly big game worldwide, and the Rugby Union World Cup claims to be the third largest sporting even in the world.

The biggest single event in world sport in the next 24 hours will be the “test match” played between the New Zealand “All Blacks” and British and Irish “Lions”, in Christchurch, New Zealand. The stadium only has a 35,500 capacity, and it could be probably be filled three times over. Now, New Zealand is a single sport country- rugby is a religion and a way of life, so you might not be surprised to hear that. What’s really astonishing is that half of the stadium will be filled by Lions supporters who have literally travelled half way around the world to be there- there are said to be between 20-40,000 Lions supporters who have arrived in the country over the last two weeks to follow the tour. Consider that there were only 250,000 foreign visitors at the entire Athens Olympics, that the cheapest flight from London to Christchurch would cost you over $1000 and that this is the middle of their winter.

Moreover, to bring a up pet issue of mine (the relative unimportance of competitive balance) these supporters would have to be crazy to think that the Lions will win. Since 1950 the Lions have played the All Blacks 27 times and lost 20 with two matches tied. A tour, which usually takes place every 12 years, usually involves three test matches, and the Lions have only ever won a series once (back in 1971). So why such a big deal? Well, there’s a lot of history behind this (the first tour took place back in 1888), and the All Blacks are worth watching just because they are, and always have been, the best in the world. Moreover, the Lions are really a one-off combination of the best that England, Wales, Scotland and Ireland can produce (normally they play as separate countries) and so it is something special to watch star players try to blend as a team in a few weeks. It’s like one of those Hollywood movies where a team a no-hopers get together and are told they have to take on the best team in the world. I’m not optimistic, but I’ll be camped in front my TV at breakfast tomorrow rooting for the underdogs.

The NCAA Gets Tough 

In a Thursday column for ESPN.com, Andy Katz writes about the sanctions handed down to Baylor University's basketball program for rules infractions. Head Coach Dave Bliss and an assistant coach are banned from the NCAA for 10 and 5 years, and the program may not play any regular season non-conference games next year. All of this comes after Baylor had already placed its program on probation for a year including the loss of post-season play (a big self-imposition because this permitted several players to transfer without sitting out a year). Katz notes
The Baylor case is one of the most extreme since, perhaps, the last death penalty case at SMU in the 1980s. Baylor was close to being shut down for 2005-06 since the committee used that same provision to get rid of non-conference games for the first time ever ...

The infractions committee sent a serious message with this case, one that should be heeded by all institutions, coaches and players in Division I.
The "serious message" sent is open to interpretation. Katz implies that the NCAA signaled schools of its willingness to come down hard on rule-breaking. An alternative (though not mutually exclusive) spin on this message would be Abe Lemmons' great quip, "The NCAA is so mad at Kentucky that it put Cleveland State on probation."

My 1992 book on the NCAA as a cartel with Trey Fleisher and Bob Tollison advances the Lemmons' view more so than Katz's. The book highly simplifies a complex organization. The cooperative-competetive games within the NCAA involve a number of dimensions with a variety of coalitions. Nevertheless, I still think that several of our basic insights hit on key behavioral outcomes. The pertinent one here is that the NCAA does want to send a "get tough" signal but that the SMU's or Baylor's of the world are much more likely to be sacrificed at the altar than the real big boys. High-flying programs such as Notre Dame, Florida State, Miami, Michigan, and Alabama have all had "serious" misconduct both alleged and "proven." One can argue about the "seriousness" of any one episode versus another or about "patterns" of conduct. While Michigan and Alabama received sanctions that were stiff for "big schools," neither received the death penalty of SMU or modified death penalty that Baylor even though the cases involved huge direct payments to players, dwarfing anything in the Baylor case.

The "stick-it-to-the-little-guy" hypothesis is often misunderstood. It does not imply that the Infactions Committee members openly discuss differential standards or even have that kind of idea in mind. Only a "behaviorlist" view of the world requires such. Instead, the Committee members need only to respond to the (strong) incentives to keep the big boys up and running. The makeup of the Committee may itself lend itself in this direction (currently 3 members are from the University of Alabama). Even without membership being stacked, all members are aware that a death penalty or modified version of it for a Michigan or Alabama may send a signal but also imposes huge, negative consequences for the rest of the NCAA schools. In contrast, Baylor's loss of half of their season creates little impact on the NCAA as a whole. One might call it a version of the "too big to fail" kind of incentive sometimes at play in public policy.

Wednesday, June 22, 2005

It's those greedy overpaid players, again 

At least that's the media's version. From correspondent Nick Ebinger:
On SI.com, the otherwise estimable Peter King writes that teams are selling stadium naming rights because "player salaries demand it."

Questionable use of the word "demand," no?
Quite right, Nick.

Payments for naming rights are a windfall. Step in an owner's shoes and ask yourself the question: "would I turn down $20 million for naming rights to my stadium?" You might, if it pissed off enough fans to hear the name of, say, Mr. Wrigley's field changed to, oh, Pepsi Park. They might watch fewer games and be willing to pay less for tickets. If the value of those effects surpassed the $20 million you'd capture by switching the name from chewing gum field to pop park, then you'd say no thanks to Pepsi. But what you pay Mark Prior has nothing to do with it.

Tuesday, June 21, 2005

Twins Officials Acknowledge Lack of Economic Boost from Stadiums 

The main players in the Minnesota Twins' bid to get public funding for a new stadium have dropped the economic impact argument. They acknowledge what economists have said for years: stadiums and sports teams are not catalysts for economic growth.

Jerry Bell, lead man in the Minnesota Twins' bid for a new stadium, has given up on one of the arguments that the team used to make in pressing its case.

A publicly subsidized $478 million stadium could be great for the club, but Bell isn't saying it would also spur business activity in Minneapolis or Hennepin County.

"I don't think the economic argument turns it one way or another, so why go there?" said Bell, president of Twins Sports Inc. "If there are side benefits, great. If not, so what?

"You get into an economic argument, and the bottom line is, 'Do you want to build it or not?' " he said.

In dropping the stadiums-as-economy-boosters argument, the Twins are acknowledging what economists long have argued: Stadiums built for pro sports fail to deliver measurable financial returns for their communities.

"At some global level, they're obviously correct," Bell said.

The global level, in many cases, is not much greater than the immediate neighborhood, if that much. In saying this, the Twins have sort-of acknowledged what economists have been saying for years. Meanwhile, Sid Hartman, long-time Minneapolis Star-Tribue columnust, continues to play the economic development card:

Twins officials say a new ballpark in back of Target Center could result in some big revenue for the city of Minneapolis, with a conservative estimate of $90 million, or $3 million a year, in sales taxes during the length of the 30-year lease.

In addition, there would be a tremendous amount of income from parking ramps owned by the city and more sales tax on purchases made by fans attending the games and the various restaurants in the loop, including the Warehouse District.

And if you don't believe that sporting and other events downtown don't result in spending, check with the various bars in the Warehouse District. And go to St. Paul and ask the operators of various bars and restaurants and parking lots and ramps how much business they have lost because of no Wild games. Don't believe reports otherwise.

In Minneapolis there would be new real estate taxes on the many developments planned by investors in the ballpark area.

So what happened when other sporting venues were built in the Twin Cities? Is there a history of development around ballparks and arenas in the Cities? From the first article linked to above:

Consider the Metrodome: Opened in 1982 at a total cost of $68 million, its boosters predicted that the stadium would be a magnet for new construction in a part of downtown that hadn't seen new private investment for years. Instead, the building boom of the 1980s and 1990s in downtown Minneapolis bypassed the Metrodome neighborhood.

"We put a stadium in the middle of nowhere and nothing developed around it," economist Art Rolnick said of the Metrodome. "If these things are magnets for economic development, what happened?"

Last week I wrote this post on why Cubs games are more popular than White Sox games. Several commenters point to the neighborhood around Wrigley Field as a primary reason for the current popularity of a Cubs ticket. Wrigleyville and Wrigley Field complement one another. But for this sort of thing to happen, things have to fall in the right place, and in my humble opinion, it's very difficult if not virtually impossible for government officials to get things to "fall in the right place." From the first article:

The Target Center, acquired by the city of Minneapolis from private developers at a cost of $74 million in 1990, now sits next to the Block E entertainment center, but Block E was built only through $40 million in public subsidies.
The Target Center (home of the NBA's Timberwolves), by itself, didn't boost development. So the Minneapolis city government gave development a boost by subsidizing the construction of Block E and 12 years after the Target Center opened, the first phase of Block E opened. But there's no guarantee that Block E will be a magnet for new spending either.

Sunday, June 19, 2005

The Father of Sports Economics Passed Away Without Notice 

In 1956, the Journal of Political Economy published Simon Rottenberg's seminal piece in sports economics, "The Baseball Players' Labor Market." In researching a commemorative piece on the impact of that paper on all of us that think about sports business and economics, his wife Annette informed me that Professor Rottenberg passed away in January 2004.

I feel awful about this for two reasons. First, it was never my pleasure to make his acquaintance. Second, how could I not know that this giant, whose broad shoulders nearly all of us working on sports stand on, had died over a year ago?

If you haven't read the piece, you should. It is approachable by all readers; there isn't a derivative or a regression to be found. But he lays out the clear logic of the uncertainty of outcome hypothesis, the invariance principle, and a comprehensive specification of attendance demand. He also clearly states what Neale later called the "Curious Economics" of sports leagues. There is also the rudiments of arguments made later by those interested in the imbalanced incentives given to young people when the returns to sports earnings are uncertain and very large.

The invariance principle essentially says the same thing as the weak form of the Coase Theorem, but it is significant that Rottenberg published it fully four years before Coase. He used it to different purpose than Coase, but the logic is there first nonetheless.

Nobody will ever convince me that anybody but Simon Rottenberg is the father of sports economics. Lest we forget.

Saturday, June 18, 2005

Fines in Sports 

Jon Weinbach has a good read in yesterday's WSJ, "When Players Don't Pay." Weinbach has unearthed a lot of data on fines in sports from news accounts and such. For example: "the NBA levied about $13.9 million in fines during the recently completed 2004-05 regular season, and about $5 million during the 2003-04 season." That's a lot of dough! But the focus of the story is more on what is not reported - the fact that most of these fines are appealed and many are reduced or eliminated. The discussion here is mostly anecdotal, but quite interesting nonetheless.

Weinbach is apparently not a fan of the hidden lenience embedded in the process. The last word, for example, is reserved for the arbitrator's decision which cut John Rocker's fine for mouthing off to SI writer Jeff Pearlman from $20,000 to $500, as if that were a bad thing. And Weinbach's effort to cast the story in a negative light traps him in an obvious error when discussing fines in NASCAR:
And then there's Nascar, which returns penalty money as a matter of course. At the end of each season, fines collected from drivers and crews are pooled together and disbursed to the top 25 racers. (Shares are determined by where the drivers finish in the final point standings.) As a result, some violators not only get their penalty money back, but they actually earn a profit. In last year's Nextel Cup, Nascar's top series, the racing circuit levied 73 fines totaling $384,495, for infractions such as installing illegal windows or shoving another driver after a race. The team of champion Kurt Busch collected 22% of the total -- or $84,588. Not bad, considering the team had been fined several times during the season, for a total of $21,000. "We don't look at it as recouping fines," says a spokesman for Mr. Busch. "It's just prize money." Adds Chip Williams, a former public-relations director for the National Association for Stock Car Auto Racing, who now advises several top drivers: "It's sort of like a really good mutual fund. You put in money and you can get a solid return at the end of the season."
That's a great quote (where do these marketing people find minds like Chip Williams?), but the notion that Busch earned a profit or got a solid return for being a miscreant strains credulity. Busch gains from winning the cash donated by other drivers, not from putting up his own so other drivers can take their share.

I put a different spin on the facts that Weinbach presents. The overarching economic question is this: why do professional sports leagues rely on fines to affect behavior? To my knowledge, fining employees is not common practice in most firms. What is unique about pro sports that makes fines a useful tool?

More specific to Weinbach's piece, I am actually quite sanguine about his findings on appeals and leniency. Like Weinbach, I've given some thought to fines since the brawl between Pistons fans and Pacers players in Detroit. I stated at the time that Commissioner Stern's draconian punishment of the players hit the wrong target. More recently, Stern's bombastic $100,000 fine - and threatened ban - for Jeff Van Gundy's miniscule escalation of the standard "stinkin' refs" line was absurd. The man is simply out of control! So I'm pleased that Weinbach has documented the checks and balances in the system, and that they are routinely used.

Thanks to Carl Bialik for the link. And while I'm at it, a question for Matt Stephenson, the mad genius of Catallarchy comments. Let's accept for the moment your proposition that diminishing marginal utility of income implies pro sportsmen play for the love of the game. Can you rationalize the use of fines to motivate good behavior on their part?

Thorne on stadium subsidies 

Gary Thorne, the ESPN broadcaster in USAToday:
For years the Yankees were part of the wailing cries from involved team owners that public funds were needed to build the west side project if the teams were to stay in the city. Bull.

As with all moneyed people, the first rule is to use someone else's bucks to finance the business of your desires. Nothing wrong with that until the till one seeks to tap is the public coffers.

The evidence continues to mount with independent study after study that public investment in sports stadiums for pro teams is at best a financial wash, and usually a negative return on investment.

Check out the materials at economics.about.com. Good reading rarely cited by teams.
He goes on, referring to the stadium shenanigans in DC last fall, and the recent rash of privately financed proposals in NYC:
Funny how the Yankees suddenly have the $800 million to build a new park ... right after the Mets announced they had the private cash to go forward.

...The case of the new stadium being financed by the District of Columbia for the Nationals is a real disgrace. The District is desperate for funds for schools and other services that tax dollars support.

Yet, it voted to build a new stadium for the team's owners -— none other than Major League Baseball -— who bought the Expos and moved them to D.C.

...If the District had refused to fund the stadium, the same thing that happened in New York would have happened in the Nation's Capital. The money would have suddenly appeared --— either from the new owners or from the coffers of MLB owners.

Besides, RFK is not such a bad place to play. It's just that the owners want those luxury boxes and the money they bring. That being the case, let them live by the system they love to tout when it comes to everybody else's business-free enterprise.
It's nice to hear Mr. Thorne speaking out on this issue, again. I hope he doesn't get fined (see post above).

Friday, June 17, 2005

Is Hockey in Trouble?
Results of an Unscientific Poll 

From the Toronto Globe and Mail, an on-line voluntary poll asks,

Now that talks have progressed, will you be happy to see the return of NHL hockey?
The results should be cause for at least some concern.

Yes: 5942 votes
(38 %)


No: 9655 votes
(62 %)


Total Votes: 15597

Ownership of Man Utd and the public interest 

Reflect for a moment on this, from today's Telegraph:
Manchester United supporters opposed to Malcolm Glazer's takeover of the club are hopeful that the Office of Fair Trading will rule against the American tycoon, just as they stopped Rupert Murdoch and BSkyB's attempted takeover at Old Trafford six years ago.

Tony Lloyd, the Labour MP for Manchester Central, said: "We are looking for an equivalent referral."

Murdoch's bid was stopped by the OFT, the United Kingdom's competition watchdog, as it breached competition laws. Lloyd, however, is not arguing that the Glazer takeover breaches these laws, but that it is not in the public interest.

He said: "Last night I heard an interesting legal opinion that this matter could be looked at as a public interest issue. I have been advised that there is nothing to stop the competition authorities looking at the question of public interest and reporting their views as to whether this bid matches the public interest test. I have asked the Secretary of State for Trade and Industry, Alan Johnson, to refer it to the authorities."
Now, this Arsenal supporter would be quite happy if Glazer's strategy took Man Utd down to the third division, known these days as "League One." But that's mere fantasy.

Surely, the MP's efforts are just as fanciful. A judgement that this takeover should be blocked for being "against the public interest" is inconceivable - what a precedent that would set!

This scene from the great Man Utd takeover saga illustrates how politicians garner support by proposing hopeless "remedies" for public ailments that do not exist.

Thursday, June 16, 2005

Cubs vs. Sox 

The June 15th Wall Street Journal had an article on a facet of the Chicago sports scene which is frustrating to followers of one of the city’s baseball teams: even when they are having a good season, White Sox fans don’t come to the park ($$$ required) like Cubs fans do.

The Chicago White Sox have the best record in baseball, and their best chance in years of ending an 88-year drought of World Series championships. But here in one of America's great sports towns, hardly anyone seems to care.

The team has tried almost everything to lure fans, including half-price tickets on Mondays, $1 hot dogs, and roving bands of cheerleaders who give free tickets to anyone who happens to be wearing a White Sox hat or jersey. Still, the Sox are averaging only 23,000 fans a game -- a tad more than half the capacity of their South Side home, U.S. Cellular Field. When the Sox recently faced another first-place team, the Los Angeles Angels, only about 20,000 showed up, despite delightful weather and a 2-for-1 ticket special.

Why is this? Here are some possible reasons.

  1. White Sox fans watch on the television
  2. Anger at Jerry Reinsdorf for his part in the 1994 strike
  3. Fans don’t like US Cellular Field nor its location
  4. The Cubs are simply more popular

The first one is fairly easy to dismiss. Even though the Sox tell us that they generate more TV revenue than the Cubs, I doubt this is true. The popularity of the team at the stadium is positively correlated with the popularity on the television.

To examine the other three points, I ran some simple regressions on attendance levels for the Cubs and White Sox using data from 1970-2002. For those interested in the nuts and bolts of the models as well as the results of the regressions, I’ve posted that information here at my Market Power blog. We can discuss whether I chose appropriate variables and models and whether I have sufficient observations, but some interesting things came from the regressions.

Fans of both teams like winning (no surprise here).

Fans of both teams like offense (no surprise).

White Sox fans don’t seem to mind US Cellular Field.

There is some evidence that there is some anger at Jerry Reinsdorf during and since 1994. Since 1994, after controlling for the other factors, the White Sox have drawn approximately 550,000 to 600,000 fewer fans compared to the Cubs. It is hard to tell whether this is due to his part in the 1994 strike, but the evidence is consistent with this notion.

After controlling for the other factors, the Cubs have drawn approximately 400,000 to 460,000 more fans to their ballpark. This, along with the attendance hit the Sox have taken since 1994, suggests that the Cubs have drawn approximately 1,000,000 because 1. they are the Cubs and 2. they are not the White Sox. In other words, Chicago fans like the Cubs more. For the Sox, that’s gotta be a Big Hurt.

Why are the Cubs more popular? I can think of a couple reasons.

  1. WGN’s reach and broadcasting of Cubs games in the past led to a much wider appeal for the Cubbies. I posted here on baseball teams that have premium ticket pricing. The Cubs are considered a premium game by most if not all of these teams that play the Cubs and, if you’ve watched a Cubs road game, you know that there are usually many Cubs fans in attendance no matter where they play.

2. Wrigleyville is an area that other clubs would kill to have surrounding their ballparks. The many bars and restaurants surrounding the ballpark, the historic qualities of the stadium, and the fact it is truly a neighborhood ballpark make Wrigley Field a tourist destination.

This is very frustrating for those connected with the Sox, but I don’t expect the trend to change anytime soon. That would take some good marketing by the Sox along with some bad marketing by the Cubs. The Cubs may not always have fielded the best teams, but the Tribune knows how to milk its cash cow in spite of this.

Monday, June 13, 2005

The Yankee Salary Premium 

The Yankees $200 million payroll exceeds the next highest team by $85 million and the bulk of teams by well over $100. Often, pay reflects productivity, especially when averaged over a sizable group of workers. Sometimes, pay also reflects "rent" flowing to an input -- a premium paid above their market value. Does the gap between Yankee salaries and the rest of the league represent primarily a productivity difference or is there also a sizable premium above market being paid to Yankee players?

To explore this question, I performed a rough experiment to determine the payroll at which I could put together a team matching the productivity of Yankee players. I matched Yankee players with other MLB players by position. I tried to avoid "cherry picking" high performing players with unusually low salaries or by using a player with an especially good year right now versus a Yankee having a down year. Instead, I matched by OPS (on base + slugging) and pitchers by ERA where the statistics of the non-Yankee players have been roughly equivalent or better than their Yankee match for at least a couple of years. I excluded A-Rod because his whopping $25 million salary is still primarily paid by the Rangers. Here are comparisons for the top six salaried position players (in millions; alaries from Fox Sports) and top four starting pitchers plus, "closer," Mariano Rivera:
Position Players
Jeter - Mike Young ($19.4 - $2.5), Giambi- Phil Nevin ($13.4 - $9.4), Williams - Tory Hunter ($12.3 - $8.0), Sheffield-Tim Salmon ($11.4-$10.1), Posada - Jason Varitek ($11.0 - $8.0), Matsui - Frank Catalanatto ($8.0 - $2.7).

Pitchers
Mussina-Halladay ($19.0-$10.5), Brown-Oswalt ($15.7-$6.0), Johnson-Mulder ($15.4-$6.5), Pavano-Hudson ($9.0-$6.7), Rivera-Hoffman ($10.5 - $5.0).
In total, the Yankee salaries add up to $145.1 million while the non-Yankees add to $75.4 million. These figures do not even take account of the $20 million or so spent on the next four, second-tier Yankee pitchers such as Wright and Gordon. Players filling similar roles with better numbers on other teams make anywhere from the league minimum up to around $2 million per season. In total, the Yankees are paying around $165 million for players whose mirror images on other teams are making under $80 million.

One could certainly argue with any of my particular matches. Nevertheless, the main point is that I could easily put together a team of players whose productivity, more or less, equaled the Yankees' with half of the payroll. In other words, the $200 million payroll reflects as much a Yankee premium as productivity.

Jeter and Rivera probably illustrate the "premium" point best. Jeter is a very good player whose defensive skills are probably best suited to second or third base. At these positions, his offensive numbers are solid but not Hall of Fame caliber, yet he makes a Ruthian $19.6 million. Change his name, take the Yankee label off, pluck him down in Texas or St. Louis and he makes less than $10 million -- probably way less. Rivera is a great "closer" -- maybe the best ever. However, he pitched 78 innings last year but makes a salary equal to or above almost any non-Yankee starter pitching 200+ innings. Very, very good closers around the league are available for less than Hoffman's $5 million.

Why might a premium exist? I would suggest three possible explanations

#1: Players find playing in New York to be more difficult than other locations and must be paid a "compensating differential" for this "hazardous" duty.

#2: George Steinbrenner wants to win so badly that he does not care that he spends double the amount necessary to attract a player.

#3: Players negotiating with the Yankees are aware of the higher media revenues that the team generates. Rather than permit Steinbrenner to pocket all of the difference between their value to other teams and their value in NY, these players negotiate deals that capture some or most of these additional revenues.

My guess is that the last explanation covers most situations. It amounts to effective "rent-seeking" on the part of players. Their salaries may reflect the value of their productivity in the Yankee market, but it vastly overstates the productivity difference between them and the rest of the league.

Saving face and looking silly 

The latest move in New York City's Olympic saga is just bizarre:
Mayor Michael R. Bloomberg committed last night to help the Mets build a stadium that could be converted into the centerpiece for the 2012 Olympics in an 11th-hour deal to salvage the city's bid for the Games.

The Mets would pay the cost of the stadium, which would open in 2009 and be built adjacent to the existing Shea Stadium in Queens. It would be converted for use for the Olympics if the city is chosen as the host for the Games.

The city and state would contribute $180 million for improvements to the infrastructure around the stadium and would pay an additional $100 million to convert the stadium to Olympic use.

The Mets' principal owner, Fred Wilpon, said he would not know the cost of the stadium until a design was selected, but he estimated that it would be $600 million.
This might be a good deal for both parties. Who knows? But here are the facts as we know them.

1. This is the first we have heard of such a partnership. To this point, the mayor has refused to acknowledge even the possibility of using Queens as a site for the Olympic Stadium.

2. Paris and London are laps ahead of New York in the race for 2012. A quick switcharoo on the stadium plan is a huge longshot to claim the bid for New York.

3. The public has been told repeatedly what a tremendous project - a "catalyst" and "anchor" for development - that a stadium would be for the West Side of Manhattan.

4. In choosing the site alongside Shea, the Mayor and Co. are giving up on the development theme, unless they plan on filling in Flushing Bay.
Those are the facts. What does one make of them?

My take is simple: the stadium as development theme has been exposed as a mere politician's ploy. If the story were true - stadiums are worthy of public investment because they are a unique catalyst for development - the benefits of the Manhattan stadium are still there to be realized.

The impending award of the games to Paris would give New York time to get the pieces in place for the Olympics of 2016 - time to sell a skeptical public on a plan that the administration believed in. But the Manhattan location was abandoned like a car taken for a joy ride. Like a child, the city's administration wants their Olympics, and wants them now. The rest is just a sideshow.

Friday, June 10, 2005

Malcolm Glazer, cartel buster 

The Times (UK) claims to have seen documents which reveal the nature of Malcolm Glazer's business plan for Manchester United. Item one is higher ticket prices:
Manchester United ticket prices are to rise by 54 per cent within five years, under plans by Malcolm Glazer, the club'’s new owner, to boost club revenues to £246 million by 2010.
This won't make United fans happy, but it makes sense. Lately I have been reading on ownership issues in English football. On the surface at least, English clubs appear to underprice tickets relative to a profit maximizing standard. English ownership certainly caters to the interests of supporters in a way that North American clubs don't. The new book by Syzmanski and Zimbalist makes this point, and it's also evident in the papers available at the University of London's Football Governance Research Centre.

Underpricing might make sense in a world without international competition for talent. Suppose it is true that English clubs operate on the principle that costs (think player wages) are constrained by club revenue. In this case, a tacit agreement among the clubs to restrain gate revenue is merely translated into lower player wages. Most fans are happier as a result, and so they sing merrily in the stands, or not so merrily when they're mad at the referee or Arsene Wenger.

Such a tacit agreement breaks down in a world with international competition for players. Internationalization has only recently become rampant however, and there are significant restraints on this competition. Further, the English League's revenue position as it stands is substantially better than any other country. Thus, a tacit agreement could survive in some form for some time before it unraveled.

Enter Malcolm Glazer. He is certainly hastening the demise of the "English way" of club organization. But more than that, he's the cartel buster.

It could be as simple as this: Glazer realizes "the cartel" is doomed, and is willing to be the active protagonist. He'll take both the profits and the public abuse that comes from breaking down a gentlemen's agreement among English clubs. It's part and parcel of being the agent that busts a cartel. A cartel which in this case is a more gentlemanly form of club organization whose days - at the top flight at least - may be numbered.

Premium Ticket Pricing 

For years, collegiate athletic departments have employed a differential ticket pricing strategy for home football games against premium opponents. The University of Oregon is charging $32 for the Duck’s 2005 game against Montana and $55 for the game against in-state rival Oregon State. The University of Nebraska also employs a differential strategy for its football program’s games, but not to the extent that the Ducks do. For its 2005 non-conference home games, NU is charging $50 and for conference games, it is charging $55. Of course, every home Husker game has sold-out since 1962. That tells us something about NU fans – they love their Huskers and their willingness to pay is consistent across games compared to Duck fans.

Baseball has only recently gotten into the act of differential pricing for certain match-ups. From the St. Louis Post-Dispatch:

Playing on Busch Stadium's imminent demise and unprecedented regular season matchups with two storied American League franchises, the Cardinals put into effect the surcharge for series against the world champion Red Sox and the Yankees as well as nine league games that include the season's final series against the Cincinnati Reds. The club anticipates almost $2 million in additional revenue while saying it has received minimal fan backlash.

But differential pricing based on match-ups is not employed by a majority of baseball clubs:

As teams look for more creative ways to maximize revenue, variable ticket pricing is becoming increasingly widespread in the game. Wallace estimates "about one-third" of Major League Baseball's 30 franchises charge more for some games.

Looking at each of the “seating and pricing” links for each team at mlb.com, I found 8 teams that are charging premium prices for particular match-ups this season: Cardinals, Cubs, Red Sox, Royals, White Sox, Brewers, Diamondbacks, and Mets.

The idea behind differential pricing for certain match-ups is straightforward: a team’s fans have a higher willingness to pay for games against particular opponents – their team’s rivals (Cubs vs. Cards) and clubs charge the higher prices to generate extra revenue. Differential pricing is also used for games on particular dates (for example, weekend games) and for special events (for example, the last series at Busch Stadium). More from the Post Dispatch:

"We have such a high demand for certain dates, and we have such a great home schedule," Cardinals President Mark Lamping said Wednesday. "If we can sell tickets and not affect demand through the price, it obviously raises revenue for the club and allows us to support our revenue needs without having to raise prices across the board."

One reason why teams would not employ a differential pricing strategy is that their fans do not have different willingnesses to pay for particular match-ups. But there’s another reason. People I’ve talked to with Major League Baseball say league officials have generally frowned upon the practice of premium match-up pricing because they would rather not acknowledge that one team’s entertainment value is higher than another’s. But given that fans have different willingness to pay for particular match-ups, this lack of acknowledgment carries a steep opportunity cost for baseball teams.

Thursday, June 09, 2005

The World Cup & economic activity 

How's this for economic impact?
A German city is rushing to install a series of drive-in wooden "sex garages" in time for next year's Soccer World Cup and an expected boom in the local sex trade, a city official said on Wednesday.

Dortmund, one of 12 cities to host World Cup matches, is anxious to keep prostitutes and their clients off the streets by providing them with discreet places to do business.

Experts estimate as many as 40,000 prostitutes may travel to Germany to offer their services to fans during the tournament.
Drive-in sex garages... there's no limit to the wonders of specialization.

Update: I just noticed that co-blogger Phil Miller posted on the same news at Market Power earlier. I came across the story while reading the account of the US team's victory over Panama at Soccernet, and I was put onto Phil's post by the most valuable Economics Roundtable. It's a small world. I'm compelled to add that this information decreases my demand (slightly) to follow Sam's Army to Germany, although I'm still willing to accept free tickets.

NHL Socialism 

This bit from John's post on the NHL's potential CBA is stunning:
According to the formula, a dollar-for-dollar luxury tax will kick in at the midway point between the floor and the cap. If the floor of the lowest team proves to be $22-million and the cap on the highest team is $36-million next season, then the tax will come into effect at $29-million.
A 100% tax on payroll over $29 million? That's downright punitive. It would certainly act to equalize spending. But more relevant, short of unitized ownership a la' MLS, it's the most powerful tool to depress player salaries that North American sport has seen in some time.

Wednesday, June 08, 2005

NHL and NHLPA Agree on a Salary Cap Formula 

The Toronto Globe and Mail is reporting that it has two separate sources telling them the NHL and the NHLPA have agreed to a salary cap formula based on team-by-team revenue (whatever that means, and the meaning certainly is not clear as is evidenced by the comments and discussion at TSN.CA).

This [the salary cap system] has been the most contentious issue between the owners and players, but the sources also said it does not mean a new collective agreement is close to completion. The negotiating teams are now working on salary arbitration, free agency, qualifying contract offers and other issues, any of which could be deal-breakers.

... According to a source with ties to both owners and players, and another source close to the owners, there will be a team-by-team salary floor and cap based on a percentage of each team's revenue. The actual percentage is not known, although the league had been demanding 54 per cent.

In the first year of what is thought to be a six-year deal, based on revenue projections by both sides, the salary cap will range from $34-million to $36-million, with the floor from $22-million to $24-million.

What is not clear is how the percentage will be applied to each team, since there is a large disparity in revenue among the NHL's 30 teams, although it is clear the agreement is a complicated one. If a strict percentage were used, then a large-revenue team like the Toronto Maple Leafs would have a salary cap not only much higher than $36-million, but vastly higher than a team like the Phoenix Coyotes, whose financial situation is regarded by insiders as one of the worst in the NHL.

According to the formula, a dollar-for-dollar luxury tax will kick in at the midway point between the floor and the cap. If the floor of the lowest team proves to be $22-million and the cap on the highest team is $36-million next season, then the tax will come into effect at $29-million.

I cannot figure out the details (i.e., I may be wrong about this), but this agreement looks a lot worse than the $42m cap that the NHLPA turned down back in February. And as I wrote then, it seemed to me that Gary Bettman was correct that it was the best offer the players would see. If so, NHLPA prez, Bob Goodenow will likely soon be replaced or edged aside. The Globe and Mail story sort of supports this idea, but not quite....

Management sources said the agreement on the cap was reached because moderate voices like NHLPA president Trevor Linden were willing to make a deal and because both sides were able to agree on accounting methods after long and arduous studies of team finances by groups from both sides.

What is not clear is the role of NHLPA executive director Bob Goodenow in the agreement. While management sources insist he has moved into the background, with Linden and Saskin handling most of the negotiating, there is a long history of animosity between owners and general managers and Goodenow, who fights hard at every turn for the NHLPA members.

Player sources say there is no sign of any erosion of Goodenow's leadership, but that he has tightened up the flow of information from the negotiators.

Right.

How good is Afleet Alex? 

How good is Afleet Alex? Judging from his last three races - tremendous victories in the Arkansas Derby and the Preakness, and a gutsy third under pressure the entire trip in the Kentucky Derby - pretty damn good. He's extremely talented, and more than that, he's the most determined runner I've seen compete in some time.

But Nick Zito, trainer of Derby favorite Bellamy Road, noticed something long before most of us.
Last June, Zito ran a horse at Delaware Park, where he kept a small string. Zito's assistant, Tim Poole, arrived just before the race, and after stopping at the receiving barn, he drove to the horsemen's parking lot, located on the clubhouse turn. As Poole was getting out of his car, the horses from the previous race were pulling up on the turn. Just then, his phone rang. It was Zito, whose voice was bursting with excitement.

"Did you see that?" he bellowed.

"See what?" Poole asked, not knowing what he was talking about.

"That race, did you see it?" Zito said.

Poole, not knowing where this race had taken place, asked Zito what track he was referring to.

"Right there where you are," said Zito, who had just seen a first-time starter named Afleet Alex turn in a performance so impressive he knew immediately he had to have the horse. When Poole told him he had just arrived and hadn't seen the race, Zito told him to run in the racing office and watch the replay, and then go see racing secretary Sam Abbey and have him contact Afleet Alex's trainer, Tim Ritchey.

Zito's instructions to Poole were simple: "When you get a hold of Ritchey, tell him, 'Whatever you want for that horse just name your price'." ...

Later that day, Zito called Ritchey himself. "Nick asked if he was for sale," Ritchey recalled. "Then, he said again, 'Name your price.' But the owners (Cash is King Stable) had no interest in selling."

What was it about Afleet Alex's 11 1/4-length victory that got Zito so excited that he was willing to spend any amount for him?

"He was the only horse that's ever reminded me of Spectacular Bid," Zito said. "I remember when 'The Bid' broke his maiden, and it was so similar. I wanted to buy the horse for Bob LaPenta. I knew this was no ordinary horse; that's why I told Timmy to buy him at any price. Here I am offering a million dollars or more for a horse who had just broken his maiden at Delaware Park and they turned us down."
A comparison to the Bid - "the best horse who ever looked through a bridle" according to trainer Bud Delp, and the best I ever saw run - is not faint praise.

Alex is 6-5 in the morning line to win Saturday's Belmont. I'll be very surprised if those odds are available at post time.

Why Paris deserves the 2012 Olympic Games 

From Carl Mortished in The Times (UK).
We should give it to the French, first, because they want it so badly. ...

If almost a third of Londoners are indifferent or opposed to an Olympic jamboree, it may be because, unlike Parisians, we don’t believe all the nonsense about government-directed economic regeneration. We don’t believe that the construction of a velodrome and a kayak slalom course will transform the Lea Valley from sleepy backwater into an economic furnace. ...

The Government has no track record of competence in managing large public works projects, either directly or via part-privatised agencies. The Millennium Dome was a taster of the potential for embarrassment but a project so grand and so public as the Olympics cannot be allowed to fail.

For that reason, the IOC has achieved the extraordinary: it has extracted a blanket guarantee from the Chancellor, Gordon Brown, something no minister in the Cabinet has been able to secure. While health authorities are forced into ever more complex off-balance sheet arrangements to finance basic medical facilities, the Olympics are to get a blank cheque. I quote from the London 2012 bid document: "The Chancellor of the Exchequer has guaranteed that the UK Government will act as the ultimate financial guarantor should there be a shortfall between Olympic costs and revenues."

A licence for any contractor employed on a London Olympic project to dig in his heels and delay, delay, delay.
That's just a taste of a sumptuous essay.

Meanwhile, New York has been temporarily saved from Olympic extravagance by a combination of incompetence and fiscal sanity. While there is much rancor over the sanity part, incompetence seems to roll merrily along. The U.S.O.C., having awarded the American bid to New York with stadium plans at the wish-list stage, is compounding the error by insisting that the city "cannot pull out of the race for the 2012 Olympics before the final vote next month," i.e. that it carry on in a farce. Can't they just admit a mistake and move on?

Tuesday, June 07, 2005

Paris 2012 

The IOC released its evaluation of the bids for the 2012 Olympics yesterday, dishing out praise for the proposals of Paris and London. Paris is the odds-on favorite to host the games:
Paris, which hosted the 1900 and 1924 Games and failed in bids in 1992 and 2008, has been the favorite throughout the process and is rated 1-6 by Ladbrokes. London is second at 7-2, followed by Madrid at 16-1, New York at 33-1 and Moscow at 100-1. With 1-6 odds, a correct $6 wager pays $1.
It appears that London is a fall-back option at this point, with the following intruiging caveat: "The bookmakers' favorite has lost two of the past six bids partly because members sometimes vote for an outsider that may otherwise be humiliated, Michael Payne, the IOC's former marketing director, said in an interview last week." Now, favorites don't win all of the time, otherwise their odds would be 1-infinity, i.e. there would be no betting. But neverthless the marketing director's comment regarding sympathy for the outsider is somewhat bizarre. How many voting members are there? Even if there are dozens, don't they take their job seriously?

Issues surrounding the Olympic Stadium project in Manhattan must be resolved before New York becomes a serious contender. In contrast, support for the games appears to be strong in France.
A survey by ACNielsen Corp. in May showed 81 percent of French people support the Paris bid, compared with 68 percent of British people backing London and 44 percent of Americans supporting New York.
A synopsis of the IOC report's evaluation of each bid is in today's Telegraph. The report itself can be obtained here.

Saturday, June 04, 2005

Book Review: National Pastime by Szymanski and Zimbalist 

As a graduate student in the mid 1990'’s, I began work on a project on the economics of baseball for a research methods class. In researching the existing literature, I read Andrew Zimbalist'’s 1994 classic Baseball and Billions, a detailed examination of the American baseball industry from the eyes of an economist, a book which I reference to this day.

Although it is the world'’s game, soccer does not have the appeal in the United States that it has in the rest of the world. Baseball, on the other hand, has limited appeal outside the US. Yet soccer and baseball share common origins, and developed roughly parallel to one another in time. A comparative study of the economic factors shaping the two sports has been begging for consideration for some time. Such an analysis has just been delivered by Zimbalist and one of Europe'’s top sports economists, Stefan Szymanski, in the new book National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer. This post summarizes my lengthier review of this book (which for space reasons is located in the Essays section of The Sports Economist).

Szymanski and Zimbalist describe the origins of the sports' organizational structure and their development to the present day. As one has come to expect from the authors, the book is logically sound, and loaded with facts and illustrative anecdotes. The prose steers clear of professional jargon while remaining true to the authors' training in economics. The result is an entertaining and informative book. It will appeal to lay readers interested in the common origins and different growth paths of soccer and baseball, as well as professionally-trained economists interested in the economics of sports.

Both sports owe their organizational roots to cricket, England'’s aristocratic game of the 18th century. Like cricket, both baseball and soccer were developed as gentlemen'’s games but in contrast they had commercial appeal. Soccer'’s growth into the world'’s sport is tied to the economic and political reach of 19th century England. While America's global reach was several decades away when baseball started growing, England was the dominant global power when soccer was developed. In addition, early pioneers in each sport faced different motivations. In the United States, baseball was organized around a business model with profit maximization as the primary goal of owners. In England, soccer was organized in a more social way, with social participation as a goal. In many ways, the development of these sports mirrored social and business attitudes in the two countries.

The authors also examine many of the familiar subjects in sports economics: the demand for competition and team finances; the economic motivation of team owners in both sports; and the development of labor markets in each sport (both deriving from their roots as gentleman'’s games). The authors also examine competitive balance issues in both sports.

The authors conclude the book by describing what they view as the biggest challenge to each sport and provide prescriptions to help cure what ails each. Interestingly, the authors suggest that each sport can learn from the other to help it face its challenges.

Soccer faces a relatively short-term problem - a financial crisis due to four primary factors: 1. the strict adherence by league governing bodies to national leagues which blunts the incentive to generate competition between the biggest teams between countries; 2. the lack of a profit motive which helps to make soccer teams poor financial investments; 3. the enormous incentives to invest in playing talent related to the promotion and relegation system used in soccer leagues; 4. The reliance on past public assistance as crutches to teams in financial difficulty. To help soccer face its challenge, the authors suggest that soccer leagues adopt some qualities of the business model used in baseball to encourage more entrepreneurship and risk taking.

Baseball'’s problem is more long term. When the pioneers of baseball tried to take the game international, their main focus was on building an immediate audience instead of encouraging participation in the sport. Domestically, baseball had very little competition in the sporting world, owing in part to its antitrust exemption. Today, however, youngsters have a wide variety of choices of sports to play. Unfortunately for baseball, kids are more likely to follow and play basketball, football, and soccer than baseball. While attendance levels at baseball games are currently strong, what will they be when today'’s youngsters become tomorrow'’s adults? Thus, while the present financial situation is positive, growth prospects for baseball are not nearly as bright.

Szymanski and Zimbalist have written a readable and well-researched book that touches on most of the important topics in the economics of sports teams and leagues. One topic that did not receive much attention was a comparison of stadium investments between the two sports. The authors argue that baseball teams'’ local monopoly positions have allowed many of them to receive generous subsidies for stadiums. Soccer teams, on the other hand, lack such a monopoly positions for soccer clubs. In addition, the promotion and relegation system used in soccer leagues provides an incentive to teams to invest more in playing talent than in stadiums (relative to baseball teams). This has led to an underinvestment in soccer stadiums which may have led to some fatal incidents at soccer stadiums. Unfortunately, the authors do not provide much of an examination of the stadium issues in the two sports. Given the importance of this issue, especially in the United States, a more thorough treatment of the subject would have been very interesting and would have fit in very well with the rest of the book.

The analysis on uncertainty of outcome and competitive balance, while well-written and researched, is a bit incomplete. The authors examine two types of competitive balance: the competitive balance within a season (the dispersion of team winning percents within a league) and the competitive balance between seasons (how are championships spread among the various teams). One issue that did not receive attention in this discussion is the competitive balance issue that is the root of all uncertainty of outcome, namely the uncertainty of outcome of individual matches. This omission is not too troubling given the context of the book. Baseball teams play a 162 game schedule while soccer teams generally play between 30 and 40 matches. But because match uncertainty is the root of within-season and between-season uncertainty, it deserved a bit more attention than it received.

The criticisms I have of this book are minor, as one might expect about a book written by two of the best sports economists in the business. Each chapter is organized so that there are separate sections on baseball and soccer. While the individual sections do not break much ground by themselves, having a discussion of one sport followed by a discussion of the other sport improves the overall flow of the book. If you are interested in the historical and economic parallels between these sports, this book is a solid source of information, and (particularly if you've read this far) a recommended addition to your library.

Wednesday, June 01, 2005

Wishing Carefully 

As the proverb says -- you better be careful what you wish for because you might just get it. The econ version of this saying might be -- make sure you wish "at the margin." The Astros received their wish -- the Rocket and his pitching prowess -- and now are paying the piper.

Roger Clemens' last start offers a small glimpse of the Houston's problems. He pitched eight innings, giving up two runs, and the Astros lost 9-0. On the season his ERA is 1.30 while his record is only 3-3. Among writers and fans, issue is always, if only the Astros had some hitting to go with the pitching [for example, Blog from a Houston Chronicle sportswriter].

The Astros' faced the off-season decision whether to spend $18 million on Clemens or to spread the $18 million around on other acquisitions taking into account the team's anticipated strengths and weaknesses. Skip and I both wrote in the offseason about whether to sign Carlos Beltran. In isolation, the amount seemed like a lot, but given the Astros' situation and viewing it against the Clemens decision, it now seems like a bargain. Given that Jeff Bagwell's offensive numbers had begun to drop substantially (200 points off his OPS plateau plus a gimpy right shoulder), the loss of top RBI man, Jeff Kent, an injury to Lance Berkman, and the age of Craig Biggio, the marginal value of an extra dollar spent on an offensive sparkplug likely exceeded the value of an additional pitcher even of Clemens' caliber. After all, the Astros already possessed a young version of Clemens in Roy Oswalt (compare Oswalt's numbers to Clemens at the same career stage). Diminishing returns to signing a second "ace" pitcher set at some point, especially with the price tag attached.

Generalizing beyond the Clemens-Beltran issue, Houston offers a dramatic illustration of the fact that to excel in team sports requires a team -- not a high-priced superstar or two chewing up the team bankroll (basketball the possible exception with so few players). Clemens ($18M), Bagwell ($18M), and Andy Pettite ($8.5M) make up about 65 percent of the team's payroll -- an amount nearly equal to the Rangers' entire payroll. Besides Beltran, this $44 million would go a long way in providing another strong position player or two (catcher or SS being big needs) along with pitcher or two. Clemens is a great pitcher but very expensive for a player being used every 5th game. Bagwell's salary is commensurate with his career peak, not the form of the last three years. Pettite's salary exceeds Oswalt's by $2.5 million even though Pettite's career numbers are not in his league. Once again, I will push the theme that it's not just the amount of money available that matters but how they spend it.