## Slipping Through the Cracks - How NFL Teams Solve an Information Problem

Reed Albergotti at the Wall Street Journal writes about an information problem in the NFL and how it is imperfectly solved.

Nevertheless, at a time when other sports like baseball are paying more attention to how players have played rather than how they look, many analysts say the NFL is going in the other direction—focusing more on a player's raw build and athletic ability as measured by his performance in activities like the 40-yard dash, shuttle drill and bench press.

Jeffrey Nalley, an agent who represents both football and baseball players, says the problem is simple: As the NFL draft becomes a bigger event, NFL general managers who waste an all-important draft pick on a player who doesn't look like a comic book superhero can summon the wrath of millions.

"If you're going to take a guy in the first round, he'd better fit the height, weight and speed that they're looking for," Mr. Nalley says. "Honestly, they're covering their asses."

Reed gives a list of players who fit the "doesn't look like a comic book superhero" who have gone on and been important pieces on NFL teams.

The problem is this: who's going to be the best available player at position x and what do I have to give up to get him? It's a basic optimization-under-uncertainty problem - simple in formulating in theory, not necessarily solving in practice. You don't know who's going to be the best player over the next x seasons, but there are tangible things positively correlated with future productivity, namely height, weight, 40 yard dash times, and the look of the player's body.

Mr. Nalley, quoted in the article, says that teams are just "covering their asses" when they pick the specimens. That may be true at the margin, but my guess is that if you randomly picked 22 "comic book superheroes" and I randomly picked 22 comic book authors, your team would whup my team's ass in repeated games more often than not.

It should be noted that this way of solving an important information problem - who's going to be a productive football player over the next x years - is also employed by college teams. Chase Daniel, the former Mizzou great, Metroplex high school star, and Texas Longhorn fan, was all but ignored by Texas coach Mack Brown*. Brown, instead, had gone after targets who fit the typical mold better. Daniel went on to be one of the best if not the best QB ever at Mizzou while taking Mizzou to unfamiliar heights. Meanwhile, Texas remained a perennial top-10 football program.

*Brown ended up offering Daniel a scholarship, but only after his main QB target, Ryan Perilloux, reneged on an oral commitment.

## 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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## Judge Sotomayor & Sports Labor Relations

Joel Maxcy, Coordinator of the University of Georgia's Sport Management Programs, has started a blog, Sports Labor Relations. In this post, Joel examines Judge Sotomayor's decision in the Clarett case in light of the precedents set in the well known Mackey vs. NFL case. His careful analysis strengthens my belief that Sotomayor's decision steamrolled useful and efficient legal precedent in favor of a union-friendly finding.

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## From the Archives: Judge Sotomayor's Decision in the Clarett Case

In addition to her injunction which brought an end to the baseball strike of 1994 (on this, see Richard Sandomir's piece in the NYT today), Supreme Court nominee Sotomayor played a significant role in the recent Maurice Clarett case. Clarett, of course, was a college football star who was running out of chances in the NCAA, and sued the NFL to overturn the eligibility rules which precluded a sophomore from entering the draft.

Here's my commentary on Sotomayor's ruling at the time, along with a renewed link to the decision itself. TSE's old posts have lost their formatting over the years (nice one, blogger!) so I've copied the content in it's entirety below.

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Tuesday, May 25, 2004
3-0 to the NFL

The NFL won its appeal in the Clarett case. Greg Skidmore at the Sports Law Blog finds the decision satisfactory. I find it both illuminating and evasive.

Judge Sotomayor's decision references a number of cases upholding the exemption of restrictions in collective bargaining agreements from antitrust, both in sports and elsewhere. The discussion is authoritative and informative. It notes that the exemption does not apply when the restriction imposes harm on business competitors who are not party to the contract. This is not the case here: the harm is imposed on an prospective employee who is not party to the contract.

The court points out that CBAs encompass numerous issues, and that selecting one clause for antitrust scrutiny may upset the balance of compromises among employers and employees. It is not obvious to me that this concern should protect an anticompetitive restriction - simply address the issues without violating the law! Nevertheless the sanctity and primacy of collective bargaining to this court is readily apparent in the decision, making it clear that an antitrust challenge faces heavy going. The decision clearly implies - and the 2nd circuit has said this before in reference to the NBA draft - that if the NFL wants to cap salaries, the union can offset the negative effect on their wages by limiting the wages paid to future players in subsequent drafts. Prospective players are clearly harmed by this, but the restriction passes muster under the 2nd court's interpretation of the law.

The decision is evasive on two major counts. First, apart from mentioning the NFL's claim that the rule protects young players from physical harm, the decision wastes nary a sentence on the issue. The reason is clear - since labor law trumps antitrust, there is no need to judge the reasonableness of the restraint. Second, in announcing this in unabashed terms, the court tiptoes around the real issue here:
In the context of this collective bargaining relationship, the NFL and its players union can agree that an employee will not be hired or considered for employment for nearly any reason whatsoever [emphasis added] so long as they do not violate federal laws such as those prohibiting unfair labor practices ... or discrimination.
That the restriction is discriminatory is obvious. But youth is apparently not a protected class, unlike minorities or the elderly. I find this odd.

Not all courts allow collective bargaining as much latitude as the 2nd circuit. In the Mackey case, the "Rozelle rule" on free agent compensation was struck down by the eighth circuit. Following Supreme Court precedent, one of the tests applied was whether the restriction "primarily affects only the parties to the collective bargaining relationship." This test clearly conflicts with the approach of the 2nd circuit to labor problems. The decision simply notes that the approaches disagree, and not surprisingly, the decision in Clarett sticks to the precedent adhered to in prior cases in their circuit. An appeal to the Supreme Court might establish which approach they prefer, and thus clarify matters.

I'm not as enamored with labor law as Judge Sotomayor, and I'm not as pleased with the decision as Skidmore. By resting so completely on its "labor law trumps antitrust" basis, the appeals court ducked the most interesting questions in the case. Nevertheless, the decision is clearly exposited and informative, so it will go on the reading list for my sports economics class.
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## NFL Draft Trifecta

If Phil Miller's Saturday post on the NFL draft is Day 1, and Brian Goff's Monday post on the NFL draft is Day 2, let's finish this off the trifecta with a third post.

It is certainly the case that the non-statutory labor exemption to the antitrust laws places rookies and draft picks at a huge disadvantage when it comes to salary negotiations. While we are fond of talking about how the reserve clause in the major sports leagues died with the advent of free agency, in fact the reserve clause is alive and well today. It's just that it is only applied to players in the first few years of their career. Of course, given the relatively short careers of most professional athletes, the current reserve clause rules may cover a typical athlete's entire career.

That being said, let's not be too hard on the non-statutory labor exemption. Without this judicial understanding of the labor laws, most of the league rules put in place to promote competitive balance would be under constant threat of antitrust litigation. Without a union's consent, the reverse order draft, salary caps, luxury tax, roster limits, etc., all of which are the result of individual teams coming together and conspiring to limit player compensation, would clearly be, if not per se violations of the antitrust laws, at least subject to significant scrutiny under the rule of reason.

Without the ability to negotiate in good faith without the threat of impending antitrust action, it is unclear how modern sports leagues would be able to function efficiently, at least in terms of promoting competitive balance.

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## US & EU labor rules drifting further apart

Millions of pounds change hands when promising teenagers move from feeder clubs to the giants of European football. Cristiano Ronaldo (£12m at age 18, to Man Utd) and Theo Walcott (£12m at age 16, to Arsenal) are prime examples. In the U.S., young players enter the league through the draft. In the NFL draft, the monetary terms are limited by the league's collective bargaining agreement, keeping a lid on signing bonuses and compensation. In MLB, where the players union has been stronger historically, there are no limits. At least not yet.

As the WSJ reports, in last year's draft, the Detroit Tigers took a risk that the 26 teams choosing before them would not: they paid the \$10 million asking price for the most talented pitcher in the draft, Ryan Porcello. Porcello is thriving, which may be a bad thing for the players who follow him in the coming years. All the teams who had a chance to choose before the Tigers wish that the price was lower. MLB will now seek "fundamental change to the compensation system for drafted players -- a scale that limits how much drafted players can make depending on where they are picked." This possibility, of course, exists in North America due to the single entity, closed league system of MLB and the NFL. A compensation scale, let alone a draft, could not get off the ground in European football without agreement between the Premier League, La Liga, Serie A, and the Bundesliga, not to mention the lawyers in Brussels. Ain't gonna happen.

Under pressure from Brussels, the strength of European player contracts has been significantly weakened in the past year. The philosophy behind the change is the EU's intent to treat sportsmen like other workers, which in a practical sense means increasing the freedom of players to choose their employer. The first player to "walk out on contract" has now done so, with the court defining the damages of the breach to be the wages previously agreed between the player and the club. Hence, the "Webster rule:" sign for a new club at higher wages, and use a portion of those wages to pay off the club you are leaving. This rule would never fly on the west side of the Atlantic, since in the closed league system, MLB forces the Yankees to honor contracts held by the Red Sox. Arsenal's Arsene Wenger (trained as an economist) worries that the logic of the Webster ruling will lead to further unraveling of the durability of player contracts, and it is hard to disagree. The implications of Webster on the structure of contracts is worth significant attention.

The economist Edward Gramlich observed many years ago that in contrast to their economic systems, the system of sport in Europe was much more decentralized and capitalist than the monopolized democracies within the closed systems of the US. The gap seems to be increasing.

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