The Sports Economist

Still an Aston Villa fan, King loves sports -- football, cricket, tennis. He played the latter with former U.S. Federal Reserve chairman Alan Greenspan. His speeches are also peppered with sporting metaphors. Most famous is his Maradona theory of interest rates, named after the Argentinian soccer player Diego, to illustrate how people react to what they think you are going to do rather than what you actually do. On a tour of India, he called it the Tendulkar theory after the sub-continent's cricket star, Sachin. King studied at Wolverhampton Grammar School, then Cambridge and later Harvard. Teaching at the Massachusetts Institute of Technology, he had an adjoining office to current Fed chair Ben Bernanke.

In a just-released article in the Journal of Sport and Social Issues, my colleagues and I studied media coverage of 23 publicly financed stadium initiatives in 16 different cities, including Philadelphia. We found that the mainstream media in most of these cities is noticeably biased toward supporting publicly financed stadiums, which has a significant impact on the initiatives' success.

This bias usually takes the form of uncritically parroting stadium proponents' economic and social promises, quoting stadium supporters far more frequently than stadium opponents, overlooking the numerous objective academic studies on the topic, and failing to independently examine the multitude of failed stadium-centered promises throughout the country, especially those in oft-cited "success cities" such as Denver and Cleveland.

It's getting to be arbitration time in baseball. Each year a set of players and teams negotiate under the threat that a third party (a panel of three arbitrators) will render a decision on the player's salary if a negotiated settlement cannot be reached. Even though a given case is not likely to make it all the way to the arbitration panel, the threat of arbitration drives a given player and his team, when they negotiate, to consider what the panel may decide.

Arbitration, first offered to the players by the teams back in the early 1970's as a way of appeasing the union in its calls for free agency, has never been popular with teams. This article by Fred Claire at MLB.com partly explains why.

One reason it is unpopular is because of the nature of the hearing process. For the players, they try to maximize their value to their team in the eyes of the arbitration panel: a sort of "how great I art" argument. For the teams, they try to minimize the player's value: basically arguing "how great thou aren't." This is contentious.

Another reason is that simply by becoming eligible for arbitration, players see a jump in their salaries and teams are bound to accept these salaries.

Here's what Bud Selig (in 1992 PM) had to say when asked by the New York Times about the economics of baseball: "In the last 15 to 18 months, talking to every club, asking 'What do you hate most about the system?' The bottom line is if they had their choice, without a doubt, it's salary arbitration. Free agency at least you can elect to do, but in salary arbitration you're somewhat of a prisoner of what other people have done."

Claire points to the tie between the arbitration system and free agency as one of the problems.

Baseball's labor market consists of three tiers of players: 1. reserved players who have less than three years of service* are, basically, the property of their teams; 2. arbitration-eligibles - players who have at least three years of service are also the property of their teams. But they can have their salaries determined through arbitration; 3. free agents, players who are not the property of their teams and are free to sign with whoever wants to sign them.

The collective bargaining agreement (CBA) restricts what arbitration panels can consider when rendering decisions (Article VI, Section F). Among those considerations are what comparable baseball players have earned as salaries. Because some free agents are comparable to arbitration-eligibles, their salaries, somewhat filtered down and averaged out, become part of the consideration (Dan Marburger's 2004 Economic Inquiry paper on arbitrator compromise provides econometric evidence of this). That's one reason why players see a jump in their salaries when they first become eligible.

But reading the article, the rhetoric and one-sidedness reminded me that this article comes from MLB.com, the official site of MLB and, therefore, a mouthpiece of the teams. So Claire doesn't discuss another reason for why the average player sees a nice raise just for becoming eligible: reserved players are in a monopsonistic labor market and, thus, earn salaries below their marginal values to their respective teams.

You can argue that part of the difference between salaries and marginal value can be considered a return on investment in minor league training. You can also argue that part of the difference goes to pure monopsony rent. The point is that reserved players are paid less than their marginal value and arbitrated players are paid closer to their marginal value because arbitration mimics, albeit imperfectly, a competitive labor market. Thus the jump in salaries by becoming eligible.

Labels: arbitration, baseball, labor markets, monopsony

There are lots of ways to pay for an arena, but Mayor Mick Cornett said city leaders thought the choice was obvious in Oklahoma City.

The Ford Center was built with money from the original MAPS sales tax.

It just made sense to continue the temporary 1-cent sales tax, which was already extended to pay for MAPS for Kids, Cornett said.

If voters approve the Ford Center tax, it will go into effect Jan. 1, 2009, the day the MAPS for Kids tax is set to expire.

"Our citizens seem to prefer a sales tax initiative to other concepts,” Cornett said. "This is following the model that was created by MAPS. MAPS is a proven entity to our voters.”

No other NBA arena was funded exclusively by sales tax money, according to the National Sports Law Institute of Marquette University Law School.

Labels: NBA, stadium subsidies, tax revenues

A given tournament player is often thought to put forth more effort when he/she faces better competition. But what if there is a superstar in the tournament (HT to Don Coffin)? Do the non-superstars continue to put forth as much effort?

Managers use internal competition to motivate worker effort, yet I present a simple economic model suggesting that the benefits of competition depend critically on
workers'’ relative abilities,— large differences in skill may reduce competitors'’ efforts.
This paper uses panel data from professional golfers and finds that the presence of a
superstar in a rank-order tournament is associated with lower competitor performance.
On average, higher-skill PGA golfers' ’tournament scores are 0.8 strokes higher when
Tiger Woods participates, relative to when Woods is absent. Lower-skill players' ’scores
appear unaffected by the superstar'’s presence. The adverse superstar effect increases
during Woods's streaks and disappears during Woods'’s slumps. There is no evidence
that reduced performance is due to “riskier ”play.

That is from Jennifer Brown's job market paper entitled "Quitters Never Win: The (Adverse)
Incentive Effects of Competing with Superstars." Here is a Slate write up on Brown's paper. Here's the conclusion in the Slate piece (by Joel Waldfogel):

What does this mean for the nongolfing world? It's generally agreed that people work harder when they are paid for performance. Anyone who has ever languished in a Paris cafe, €”where service compris translates roughly as "the Republic of France mandates a minimum 15 percent tip regardless of service quality" €”can appreciate the power of incentives. But the effects of incentives appear to be muted when the incentives are based on relative performance and the competition is tough. We're taught that quitters never win, but if the evidence from golf is any indication, it might be more accurate, if less pithy, to say that expected losers are more likely to quit, or at least not perform as well. If you're running a business, and you have the opportunity to hire the Tiger Woods of office work, you're not going to pass up the chance. But Brown's study suggests you might want to consider its effect on your other workers' performance. Steak knives might not cut it as second prize.

Here is a link to Sherwin Rosen's 1983 American Economist article on the economics of superstars. Economists have known for a long time that the amount of effort put forth depends on its benefits and the costs. Brown's paper, according to the abstract, shows us empirical evidence that the lower the probability of succeeding, the less effort non-superstars put forth (all else equal).

I have three quick thoughts: how often are there superstars in tournaments? If superstars rarely come around, then it might make no sense to alter the structure of tournament play.

What if there are two superstars in the tournament? Then the battle among the non-superstars becomes for third place and, all else equal, this should lead to even less effort being put forth.

What about the situation where the superstar is very young and looks to dominate the sport for years to come? It seems reasonable that some with potential talent but who have not invested in that sport may decide to look elsewhere to compete.

Labels: golf, superstar effect, Tiger Woods

Sports Illustrated has an article on a paper by Mike Dumond, Allen Lynch, and Jennifer Platania on the college decision of high school athletes.

In addition to predicting the future, the model provided empirical evidence that BCS schools enjoy a prohibitive advantage over their non-BCS brethren in recruiting top talent. It also disproved several long-held beliefs about recruiting. For example, recruits don't seem to care how many players a school puts in the NFL, they aren't as interested in early playing time as they claim and scholarship reductions actually increase the likelihood that a top recruit will pick a particular school.

Here's the abstract of their paper that is in the current Journal of Sports Economics:

College football programs devote an enormous amount of resources in efforts to persuade high school football players to attend their schools. In this study, we develop an empirical model of the factors that recruits consider when selecting a school, using a database that combines school-specific attributes with recruit-specific information. The authors' estimates imply that recruits' decisions are governed by a handful of primary factors such as the geographic distance between the recruit and the college, the school's recent football rankings, and whether the school is a member of one of the six Bowl Championship Series (BCS) conferences.

Here is a non-gated version.

The finding that BCS schools enjoy an advantage might be partially explained by peer effects: being surrounded by better players makes you a better player. But since own-team peer effects might be controlled by previous seasons' performance (which is included in their model), the BCS may be capturing opposing-team peer effects (playing against superior competition makes you a better player). But if their results are capturing effects of the BCS per-se, then "the BCS designations perpetuate a permanent, caste-like structure within college football."

HT to Craig Newmark

Every coach has to look at each situation uniquely. He shouldn't have a blanket philosophy that covers every team and every individual. Every coach has to look at each situation uniquely. He shouldn't have a blanket philosophy that covers every team and every individual.

"I think you take it on a case-by-case basis," Del Rio said. "You have to do what's best for your team. It depends on the state of your team."

There is merit to the [rust] argument. But I'd rather risk having a rusty team than a banged up one.

Labels: NFL; tradeoffs

Amid fan unrest, the fortunes of the 2000 Italian champions are sinking and taking President Claudio Lotito's brave bid to defy the economics of football down with them.

.. Lazio had already sold most of their prize players when Lotito took on the debt-laden club in July 2004.

He promised a new approach after former owner Sergio Cragnotti won a league title and a European Cup Winners' Cup at the cost of driving Lazio to the verge of bankruptcy.

"It is necessary to change policy in football," Lotito told RAI radio. "The theory that who spends most wins is no longer valid. The winner is the one who carries out a proper project, based on values."

Lotito stopped Lazio going to the wall and dropping down to the minor leagues by striking a deal with Italian authorities to repay a 140-million-euro ($203-million) tax bill over 23 years.

He set a salary cap of 500,000 euros and cold-shouldered players whose wages he deemed too high, such as defender Paolo Negro and goalkeeper Matteo Sereni, until they left.

If the Sonics leave Seattle, the city's economy won't suffer and most people won't care.

That's not the tirade of some anti-arena activist; it's the Sonics' latest legal argument to try to get out of its KeyArena lease.

And it's exactly the opposite of what the Sonics have claimed when asking for taxpayer help to build a new arena.

The team made the argument in papers filed in U.S. District Court this week, seeking mediation or a speedy trial to allow the team to abandon city-owned KeyArena before 2010. In the documents, Sonics' attorneys dispute the city's contention that the team's departure would have a broad and hard-to-quantify impact.

"The financial issue is simple, and the city's analysts agree, there will be no net economic loss if the Sonics leave Seattle. Entertainment dollars not spent on the Sonics will be spent on Seattle's many other sports and entertainment options. Seattleites will not reduce their entertainment budget simply because the Sonics leave," the Sonics said in the court brief.

...Rodney Fort, a professor of sports management at the University of Michigan, who has criticized the economic-impact claims made by pro-sports teams, called the Sonics' latest argument "the best chuckle" he's had in a long time.

The news of Keegan's return sparked mass celebrations on Tyneside with 20,000 tickets sold in two hours for Wednesday's FA Cup replay with Stoke.

Prior to Katrina, New Orleans was losing population and economic clout. The return of George Shinn's Hornets to New Orleans from a two-year residence in Oklahoma City has been a failure so far. Shinn's Hornets averaged 14,221 customers per game in 2004–05. This season, Shinn's Hornets are drawing less than 12,000 per game. Last week, Shinn and Louisiana officials hammered out a new arena agreement that could keep Shinn's team in the city through 2014. But there is also an escape clause that will allow Shinn to move his team after the 2008–09 season if he cannot sell an average of 14,375 customers per home game for the final months of this season and all of next year.

Shinn is hosting the league's All-Star Game in February, which means that he not only has to sell more tickets this and next year, but he also has to hang onto those customers who bought season subscriptions just to have an opportunity to get All-Star Game festivities tickets. In an economically devastated area that was a questionable NBA market even prior to Katrina, this may be a difficult task, which is an assessment that even Stern acknowledges.

"[The new lease] sets out quite clearly that the Hornets very much want to stay for the duration plus in New Orleans. They've set some benchmarks that if we all work hard, we are hopeful that we will meet," Stern said.

The All-Star Game will give New Orleans a sports platform again, but the real question comes down to economics and whether or not New Orleans has the financial wherewithal to support a high-priced, luxury item such as an NBA team.

"We think so," Stern said. "We think [the All-Star Game], together with the city council to encourage broader distribution of their cable sports network, [puts us] at the beginning of a real growth spurt." Stern said.

New Orleans has only one of the three absolute essentials needed for a successful franchise: government support. There is very limited cable TV support, and there are few major corporate giants in the area. The cable TV battle going on between the Hornets and two multiple system operators in New Orleans' wealthier suburbs has not received national press play. Cox Communications, which runs Cox Sports Television and is the Hornets' cable TV rights holder, and Charter Communications were unable to reach a new carriage agreement last September because of the rising costs of sports rights fees and, because of that failure, Hornets games are not available in St. Tammany's Parrish. Charter reaches 200,000 people, and the NBA thinks it is critical that Hornets games are on cable TV on the north shore of Lake Pontchartrain in marketing efforts. A small market such as New Orleans cannot afford to lose any cable carriers.

The Atlanta school board could vote as early as next month on whether to allow some future school taxes to be spent on redevelopment near Turner Field, the home of the Atlanta Braves.

"The TAD for the stadium is desperately needed," said Wendy Battaglia, a landscaper who lives in Summerhill on the east side of Turner Field. "You can't have a community when there are only two houses on the street and the rest are vacant lots."

"Sports venues alone are just big black holes that have the ability to depress the neighborhoods in which they're in."

1. Sutter 130/167 (77%)
2. Gossage 125/185 (76%)
3. Hoffman 7/19 (37%)
4. Rivera 11/42 (25%)
   

Such relievers [the firemen] were ready for the rescue call as early as the sixth inning. Today's closers might be napping in the clubhouse in the sixth inning. They have become the specialists' specialists, the last layer in the stratification of the modern bullpen, reduced most often to starting the ninth inning with a lead of one, two or three runs. They don't put out fires any more. Charged often with just getting three outs before giving up a third run, they help little old ladies across the street ...

Four times Gossage saved at least 25 games while throwing more than 100 innings. It has been done 70 times in baseball history --- but not once by an active pitcher. No one in baseball has done it since Danny Graves for the 1999 Reds. Why not? ... It's counter-intuitive to think that with nutritional, training and medical advances over three decades that today's pitcher is less durable ...

The game evolves. Some day some team, by way of happenstance or a maverick manager, will use a closer for more than 100 innings again -- the reverse scenario from what Tony La Russa did with Dennis Eckersley in Oakland -- and the copycats will follow. And that's when Gossage, the newest Hall of Famer, will be honored again: when after all these years we finally see the next Goose Gossage.

In recent years ... I have become increasingly troubled about the commercial influence of how the college football season is played out, particularly with the post season bowls. The television networks ... have grown too powerful in deciding who plays and when they play, and indeed, whom they hire to coach. The BCS has become a beauty contest largely stage-managed by the networks....

Colleges need to regain ownership of their football teams.... reorienting the national football championship is an important step in managing a model that benefits students, institutions, and our constituents.

Labels: college football, college sports, NCAA

Jim Schwartz (41), defensive coordinator, Tennessee. Quite likely the only economics major from Georgetown on the list, Schwartz finished second to Mike Nolan in San Francisco two years ago. He's an outside-the-box thinker who read Moneyball and learned some things he could adapt to football. Smart, obviously, but tough enough to get players' respect. Any owner who has an opening should talk to Schwartz, if only to learn what a strong, bright mind can do to energize a program.

I think the misconception about any statistical analysis is that you're not going to be 100 percent correct," Beane said. "What you're trying to do is create an arbitrage ... if you're right 25 percent versus 20 percent you've created a 5 percent arbitrage opportunity. That's really all you're trying to do."

But when it comes to soccer, such a strategy is up against what can be described as the Power of Too; as in too many players, in too many leagues, at too many levels in a game that has too many intangibles to easily render itself to statistics. But Beane contends that when it comes to soccer, such analysis is not uncharted territory.

"Let's face it, every business has metrics that can be used," Beane said. "It's just identifying the metrics that have the greatest weight and the greatest correlation to ultimately winning. It's a work in progress, and I say this with a tremendous amount of respect [for soccer]."

To that end, Beane confirmed that he is working with Leeds University Business School professor Bill Gerrard in the hope of developing a proprietary system for evaluating soccer players, as well as looking to acquire additional sources of data.

Labels: coaches, college football