Tuesday, December 08, 2009

Revenue Sharing and Salary Caps: Will the NFL End Up Like the Big XII? 

Many folks point to the NFL revenue sharing system and its salary cap as the determinants behind the more-or-less balanced competition between the teams.

As we edge closer to a potential labor-management dispute, the NFL has decided to put part of the revenue sharing system on hold. From Chris Mortensen at ESPN.com:
In a significant move that could impact the flow of money to potential free agents and the competitive balance of teams, the NFL has notified the players' union that effective in March, owners will pull the plug on the $100 million-per-year revenue-sharing program that has subsidized lower-revenue clubs, multiple sources said.
The classic 1956 JPE paper by Simon Rottenberg contains the well-known and frequently-studied invariance hypothesis (IH). According to this hypothesis, the distribution of players does not depend on who has the right to tell players where they can and cannot play. Instead, each player tends to the market that values him the most at the margin.

Since a salary cap does not change the marginal value of players, it shouldn't ceteris paribus alter competitive balance.

Revenue sharing, on the other hand, reduces the difference between the amount of revenue teams can keep and, thus, can alter the value of players. Altering the system as the NFL appears to have done will, if it remains in place over the long haul, may create more of a disparity between "large" market and "small" market teams.

As a comparison, look at the Big XII conference in football. The Big XII (and every other college conference) is bound by a salary cap with player salaries = $0. When it comes to TV revenues, the Big XII operates under a split-pool revenue sharing system* where all television revenues are pooled together. Then half of the pot is divided up evenly among the 12 teams and the other half is divided up among the teams depending on how many telly appearances each team has made.

This means that teams like Texas, Oklahoma, and Nebraska, which have the biggest football followings and appear on TV most-often, get a bigger ladle from the money pot than teams like Baylor, Iowa State, and Kansas State.

In terms of the spread of championships, the Big XII has not been balanced. Nine of the fourteen championships have been won by either Oklahoma or Texas, including that classic game played between Texas and Nebraska last weekend. Throw the Huskers into the championship count, and 11 of the 14 championships have gone to the big market teams.

But they spend equally on players (if not coaches - click on the Big 12 link for more info).

With the divisional format in the Big XII, it is possible that an upset will occur where a "small" market team wins the overall championship over a "large" market team. Kansas State winning over Oklahoma in 2003 and, to a lesser extent, Colorado's 2001 defeat of Texas bear this out. But the spread over time tells a different story.

So we have a league with a salary cap that drives equal spending on player payments ($0) and unequal market sizes in terms of the amount of revenue received by teams when all is said and done.

So the question is this: Aassuming this descision by the NFL sticks (the NFLPA is challenging it, according to Mort), will the NFL begin to resemble the Big XII in terms of the spread of championships over time? Stay tuned, sports fans.

*Here, here, here, here, here, here, and here, are some posts and articles that describe the revenue sharing system in the Big XII and some of the surrounding controversies.

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