Friday, March 05, 2010

Uncapped Season Begins in NFL 

Do you feel a bit more uninhibited this morning? In a free-wheeling mood? A lot of NFL front office types do, because as of 12:01am, the NFL entered territory unseen since Bill Clinton was in the White House: no salary cap.

The Collective Bargaining Agreement between the players union and the NFL expires next year. When the current CBA was signed, both sides realized that they could have trouble agreeing the next time, and added a clause to the CBA designed to encourage the players and owners to agree to a new CBA: if a new CBA was not signed by 2010, the final season under the current CBA would be played without a salary cap. So much for that idea.

As of today, no restriction on total payroll exists in the NFL. Teams can sign all the free agents they want, at any salary they want. I imagine Redskins owner Danny Snyder felt like it was Christmas Eve. The Redskins reportedly cut $17 million in 2010 salary obligations minutes before the free agency period began, suggesting someone in Ashburn is getting ready to make some moves. The NFL has a handy sortable list of all the restricted and unrestricted free agents, if you want to do some window shopping for your favorite team.

I am not expecting many wild spending sprees. While Snyder has a reputation for spending like a drunken sailor even with a salary cap in place,the lack of a CBA beyond this season makes a significant work stoppage, and the sharp reduction in revenues that comes with a work stoppage, a real possibility.  Uncertainty about the terms of the next CBA should also reduce the incentive for teams to offer free agents large long-term contracts.

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Wednesday, October 21, 2009

Income inequality in pro sports 

Mark Perry has a neat post at The Enterprise Blog, looking at income inequality in the NFL. As elsewhere in the economy, the long term trend is increasing, for both median income and income inequality.

Perry states that rising income inequality "is a natural and expected outcome of ... the expanded opportunities that come from larger and increasingly competitive global markets." Is this so, especially for the NFL? Clearly, income inequality should increase with an increase in the dispersion of skill (productivity) across players. Players today are more skilled than ever before, and it may be that increases in the level of skill and increases in the dispersion of skill go hand in hand. If this argument is correct, then MLB, NBA, and NHL data should be moving in the direction that Perry documents for the NFL.

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Friday, August 07, 2009

NFL Draft Shenanigans 

Entry drafts are used by all professional sports leagues in North America to allocate incoming talent to teams. They create monopsony power for teams because they assign the rights to drafted players to specific teams, denying these players the right to negotiate with any other team in the league. In the NBA, the collective bargaining agreement includes a rookie salary scale that removes all bargaining from the process: the player drafted in spot X in the first round gets $Y.

In the NFL, a drafted player and the team that drafted him must agree on a contract before the season starts. In this system, teams pay players based on expected marginal revenue product, not actual marginal revenue product, which generates information problems. The NFL solves this problem through an unofficial "slotting" system where compensation is roughly a decreasing function of draft order; the lower the draft position, the lower the salary. Wiggle room still exists in the NFL system, because teams and players still must negotiate a contract. The system gives little power to the player - holding out is his only effective bargaining chip.

Out in the Bay Area, the inscrutable Al Davis directed the Raiders to draft Maryland wide receiver Darrius Heyward-Bey with the #9 #7 pick in the last draft, allowing the 49ers to draft Texas Tech wide reveiver Michael Crabtree with the #10 pick. Under the informal NFL "slotting" system, Crabtree would be expected to earn less than Heyward-Bey. However, Crabtree has threatened to hold out because he was ranked higher in the gadzillion mock drafts that now take place before the actual NFL draft, and argues that he should be paid more than Heyward-Bey on that basis. He is effectively arguing: "Mel Kiper Jr. says I am better than Heyward-Bey, so the 49ers should pay me more than Heyward-Bey."

Information asymmetries often lead to interesting economic outcomes. Crabtree certainly makes an unconventional argument. But the entry draft places players in a very weak bargaining position, because of the huge opportunity cost of a holdout. I expect that Crabtree will eventually sign a contract worth less than Heyward-Bey's before the start of the season.

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Wednesday, May 20, 2009

NFL First Rounders: Paid Too Much or Too Little? 

After the NFL draft, Joel Rose, a reporter from Marketplace asked me about the high salaries of first rounders and whether a rookie pay scale made sense. Here's the caption to the piece:

Backlash rising over NFL rookie inflation

Detroit Lions quarterback Matthew Stafford is slated to earn more than anyone in the NFL, a fact the commissioner says is "ridiculous." Joel Rose explores why the NFL pays more for its rookies compared to other sports leagues.

Rose echoes the widespread sentiment of reporters and bloggers (SI's Jim Trotter is an exception) with frequent comparisons of a few rookies to a some recognizable veterans who earn less. As always, there is some necessary accounting to do to really compare apples to apples, but that's not my objective here.

In my comments to him, I noted that top half first round salaries are very high. In many cases, these upper tier first rounders make 5 to 20 times more than second or third rounders. Other than very successful QBs, it is hard to imagine such large differences in their incremental contributions to winning in a sport where 11 guys are on the field at a time and 30 or so make significant contributions in a game. Gene Upshaw thought that these higher salaries only helped pull up salaries over time. However, one might contest that if the total player salary pool is a constant proportion of revenue.

However, because of widely varied roles and lack of measurables on performance for many positions, it is hard to get a handle on whether these big differences in salaries reflect top end rookie value or reflect a premium that they are somehow extracting at the cost of veteran players (particularly non-elite veterans with limited bargaining power). I decided to take a look at performance based on Hall of Fame and All-Pro slots held by different draft positions.

All-Pro Selections by Draft Round

1970-90 33% 13% 11% 6% 37%
1991-05 36% 16% 10% 6% 32%

Hall of Fame Selections by Draft Round

1970-90 51% 20% 7% 9% 13%

These figures, on their own, cannot prove or disprove a point of view on rookie salaries. They do show that, in spite of the uncertainties, first rounders possess a lot of playing value relative to others and do tend to have extraordinary careers with substantial frequency. (The data also suggest that below the second round, there is a huge amount of uncertainty: here's a related post.)