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, October 16, 2009

No Country for Old Men: The Bowden Saga 

Due to travels, I missed writing about the Bobby Bowden affair during the height of the storm. The dismay among FSU fans is strong. In an Orlando Sentinel blog poll, 42% thought it time for Bowden to go -- although a minority and not necessarily a good indicator of the precise number of such fans, it is still a fairly strong signal of the uneasiness with the situation.

The topic of age and coaching performance fits into the realm of an article by my former colleague, Tom Wisley and myself, on Is There a Managerial Life Cycle?. Using NFL data from 1920-2004, we found strong evidence of improvements with age and then a gradual decline in performance that mimics (with a 10 year lag) the decline seen in athletic performance as found by Ray Fair. Skip and his coauthor, Tom Goodwin, find similar effects in academic research. In Chapter 8 of From the Ballfield to the Boardroom, I find similar results look specifically at long-tenured coaches.

For NFL coaches, by their mid 60s, the gains of the earlier years are completely offset by the decline. Coaches who stay on beyond this point perform, as a group, very poorly relative to earlier years. Of course, these are averages -- any given individual coach may perform considerably better or worse than the averages. The effect may be less at the college level because of less demanding strategic abilities or greater because of the need to recruit players.

I applied these methods to the careers of the leading octogenarians in college coaching, Joe Paterno and Bobby Bowden, while also taking account of their switch from independents to conference members. For Bowden, predicted performance began declining by age 62. By his early 70s, this decline put him below his predicted performance at the outset of his FSU years. Now the model predicts his performance to fall below 50 percent wins. For Paterno, the evidence is mixed. Using all Penn State years, there is no discernible age effect. Although, if the sample were truncated in 2004, there is a strong age effect detectable. Somehow, PSU has overcome the usual course of performance with an aging coach.

The turmoil created by the political economy of these kinds of situations is readily apparent in the current Bowden saga. How do you unload a legendary coach? You either appear as hearltess winning-only fools, played up by the media, or you let your program slide, maybe irreparably into mediocrity. Jerry Jones barely survived his first couple of years in Dallas after firing legendary Tom Landry.

In the era without mandatory age requirements, such a situation was bound to crop up. Maybe, mandatory age retirements were an institutionalized means of avoiding such prickly situations. Such forced retirements are a blunt tool, lumping workers with diverse skills together, but they avoid the unseemly task of asking someone who has been a productive worker but is in obvious productivity decline to step aside. (Edward Lazear offered an alternative to this kind of productivity based answer for mandatory retirements back in a 1979 article).

With mandatory retirements now largely obsolete and illegal, another mechanism to deal with the likely productivity decline is to set up contracts well in advance where a retirement age is agreed upon. If FSU had in Bowden's mid-60s agreed that he would retire by 75, and they could have avoided this "prisoner's dilemma" that they now face and that was inevitable if Bowden's performance declined but he wanted to stay on anyway.

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Saturday, July 18, 2009

Premier League "Domination" at Risk 

During the last two years, the EPL has produced three of the four semi-finalists in the Champions League, a fact that has lead UEFA chief Michel Platini to consider changing qualification rules in order to re-balance the competition. Well, it looks like economic policy may do the job for him. Britain is about to hike its top income tax rate to 50%, and the pound has lost ground to the Euro. In contrast, Spain taxes foreign players at 24%. Obviously, this gives teams in La Liga a big edge in the transfer market. Could it be that Real Madrid have been "bidding against themselves" as they collect their transfer trophies?

See this story in The Guardian -- Tax burden will end Premier League's domination -- for a discussion of the tax hike's implications.

Thanks to Andrew Siegler for the link, who sees the positives in this for the English game: "I actually think this will be a good thing for English football, incentivizing English players to move abroad and learn how to play less like headless chickens." Yeow!


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Question for students: The Guardian's story states the follwing: "According to agents, most marquee signings will simply demand that clubs make up the difference so that the players receive the same net wage. In other cases, where clubs refuse to make up the difference, players are increasingly likely to opt for Spain or elsewhere in order to relieve their tax burden." What sorts of players will be successful in "preserving" their net wage, and what sorts will move abroad?

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Friday, June 12, 2009

Is Real Madrid playing the "too big to fail" game? 

That's what co-blogger Stefan Szymanski implies in this article (towards the end): "Real’s really too big to disappear, whatever debt they can incur... No bank would ever be allowed to be the bank that sank Real Madrid." Interesting... I don't know what La Liga's rules may be with regard to points deduction for clubs going in to bankruptcy. But even if they did, their history would likely be sufficient to restore them to the top, regardless. Certainly, foreign creditors wouldn't hesitate to pull the plug on Real if that was in their (the creditors') interest.

Another thought-provoking quote in the article is the opinion of Simon Chadwick:
"Real Madrid is effectively injecting inflation into the transfer market," Simon Chadwick, a professor at England’s Coventry University, said in an interview. "What we’re going to see is transfer-fee inflation over the next few months up to the start of the season. That’s a serious issue, because it’s something that (soccer) really can’t afford when many clubs have major financial concerns."
While AC Milan and Manchester United have certainly benefited from Real's profligacy, I would be surprised if this is sufficient pump-priming to inflate transfer fees this summer. Manchester City's oil-fueled ambitions may be a factor though. Time will tell.

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Thursday, June 11, 2009

Real Madrid sets record transfer fee 

The BBC reports that Manchester United has accepted an offer of £80 m ($131m US) from Real Madrid for the services of Ronaldo. This is on the heels of Kaka moving to Madrid from AC Milan for a reported £56m earlier this week. The combined annual wage bill of Kaka and Ronaldo will top £25m as well. The record spending seems incongruous to me, with the Spanish economy in shambles (the unemployment rate is over 17%, twice the EU average) and one major Spanish club, Valencia on the verge of bankruptcy. Regardless, Next season's clashes with Barcelona in El Clasico should be interesting.

Update: CNN's headline to its report is "Real Madrid defy economic gloom to buy success." There is interesting discussion and speculation on whether they'll receive an immediate return on their investment.

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Friday, April 03, 2009

"What Moneyball Missed" 

Interesting piece by Adam Fleisher at the American.

The heart of the claim:
The only problem was that Lewis's explanation for the A s success was the same as Commissioner Selig's: the team was an aberration. Since most every other team looks at the market pretty much the same way, as Lewis explained, if every team tried to exploit these same inefficiencies, then no team could. The market would correct, and the most valuable players i.e. the players with the attributes most likely to produce wins would be bought by the wealthiest teams. The championship would be for sale again.

But it isn t. Moneyball missed something. That something is known as the reserve clause.
I don't think it matters much whether Lewis' book had an explicit discussion of the reserve clause and how that factored into the A's menu. Implicitly, of course, it's effects are described throughout the book, with the A's focus on young (underpaid) players, and in particular on the Giambi trade replacement of Giambi's talent, when he became eligible for free agency.

Fleisher's three key claims are that:
1) "Well-run teams" are exploiting the "reserve clause inefficiency."

2) This will create a "smoothing of salary distribution throughout players careers." (as in the Longoria contract, which supposedly locks him and the DRays together). Young players will not be as inexpensive and older players will not be as overpaid. Top free agents will become scarcer over time; their hometown teams have found a way to keep them.

3) "Payroll will matter less and less, management will matter more and more, and the game will stay competitive."
Regarding the first point, low-payroll teams have focused on trying to win with young, "underpaid" players for decades. The A's were unusually successful because of their particular mechanism for doing this. I disagree with the latter two points, and again, the Jason Giambi trade move from the A's to the Yanks is illustrative: the best players are worth more in Yankee stadium than elsewhere. Absent additional league rules designed to inhibit the flow of talent, the market will allocate players to where they are most highly valued.

In short, this is an interesting piece, but at several critical junctures the economics are unsound. Regardless, it's a piece worth discussing over a beer or two.

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Wednesday, November 26, 2008

The Free Agent Market 

Has the free agent market seized up?
Since Nov. 14, when teams were permitted to discuss contract terms with free agents, only 2 of the 171 players who filed for free agency have signed: Jeremy Affeldt, who went to San Francisco, and Ryan Dempster, whose decision to re-sign with the Chicago Cubs hardly came as a surprise.

...A review of baseball’s transaction history since 2001 showed that the only period featuring fewer signings in the first 12 days of open bidding than this year came in the 2002-3 off-season, when Jesse Orosco was the only free agent who had signed. Each of the last five free-agent off-seasons included at least six signings by this stage, led by the 2006 bonanza when Alfonso Soriano, Juan Pierre, Nomar Garciaparra, Gary Matthews Jr., Aramis Ramírez and Frank Thomas signed before Thanksgiving.

There is a similarly attractive group of free agents available this year — C. C. Sabathia, Mark Teixeira, Manny Ramírez and Francisco Rodríguez, for starters — but teams seem to be proceeding cautiously and dispensing fewer offers than in years past.

Some baseball executives have suggested that many teams, unsure of how long it will take for the economy to rebound, are reluctant to offer expensive multiyear deals.
This will be interesting to follow between now and the new season. Increased uncertainty over market conditions and the market price for talent should delay contract formation as teams and players wait on more information to arrive. But given the rents involved and the value of pre-season training, one would expect the market to settle sometime before then - perhaps much closer to when players report to camp than in normal years. These conditions may induce more trading of players within the season as well.

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Tuesday, November 25, 2008

Amateur Baseball Players and International "Trade" 

The Japanese called it a gentlemen's agreement. It looks more like collusion to me, and it's good to see the competition for good amateurs from any country.

Many Japanese baseball officials are outraged that United States teams are courting Tazawa, a hard-throwing right-handed pitcher, because they insist it is long-established practice for amateurs like him to be strictly off limits to major league clubs. Even some American general managers, including the YankeesBrian Cashman, agree.

Major League Baseball officials maintain that the letter of their protocol agreement with their Japanese counterparts, Nippon Professional Baseball, does not forbid either league from courting amateur talent from the other’s nation. When one Japanese representative characterized the rule as a gentlemen’s agreement during a meeting in New York, he was angrily rebutted by a Major League Baseball official, according to two attendees.

The Tazawa dispute extends beyond one pitching phenom and an interpretation of honor. The Japanese major leagues have already seen established stars leave for American clubs, and amateurs following Tazawa’s path away from those leagues could further hurt the leagues’ long-term viability.

But sports talent is an increasingly free-flowing market — notably demonstrated this summer when Brandon Jennings, one of the United States’ top high school basketball players, signed to play professionally in Italy for $1.2 million rather than play at a college in the United States.

It also is an illustration of the problem with prisoner's dilemma-styled cartelization: the incentive to compete tears away at the fabric of collusion.

Via Al Roth of Market Design

Cross-posted at Market Power

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Wednesday, November 05, 2008

How sports agents earn their money 

I told Matt Lindsay this morning that I could hear the hammers at work building tax shelters overseas. Frank Stephenson at Division of Labor links to a piece which indicates that income shifting is likely to take place as well:
Obama's proposal would increase federal income tax on families earning more than $250,000 annually, money that would help finance a decrease for workers and families earning less than $200,000. It's also possible more income might be subject to the Social Security tax.

Next year's major league minimum is $400,000. Agent Scott Boras, negotiating eight- and possibly nine-figure deals for free agents Manny Ramirez and Mark Teixeira, already has thought about the possibility of asking for larger signing bonuses payable this year in some of his contracts.

"There's some consideration to be had with the impact of the election," he said.

Free agents can't start negotiating money with all teams until Nov. 14. Only a relatively small percentage of contracts are finalized before Jan. 1.

Still, for a big-money free agent earning $10 million in 2009, Obama's plan could increase his federal tax by more than $400,000.
Bang, bang, bang!

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Thursday, October 16, 2008

The Value of Recruiting 

Echoing Skip's post below, I link to this article about Kansas State assistant basketball coach Dalonte Hill, about whose salary a recent stink was raised:
Michael Beasley made Kansas State basketball relevant for the first time in more than a decade last season, and his presence put a few extra dollars in the pocket of the man responsible for luring him to Manhattan, Kan.
Kansas State had been a perennial also-ran in the Big 12 during the 90's and the early part of this decade. It was in large part due to Michael Beasley - with all due respect to Bill Walker - that KSU had the run they did last year. In a typical competitive labor market, Beasley would be able to capture his value through a salary. The same can be said of other top recruits throughout the nation.

But the labor market for college basketball talent, although very competitive, is anything but typical because the top players cannot receive payment anywhere close to their value. So their value gets captured somewhere down the line, most likely by the coaches with the ability to recruit them.

Cross-posted at Market Power

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Saturday, October 11, 2008

One more baller goes to Europe 

Josh Childress, to Greece for $20 million over three years:
"I get paid double, my role increases, I have no expenses and I move to a nice city?" Childress said. "How many guys wouldn’t do that, regardless if you’re a lawyer or a doctor?"
Or an economist!

This doesn't presage the end of the NBA, but it does put pressure on the collective bargaining agreement.

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Sunday, July 27, 2008

Free agents and the winner's curse 

Another Journal of Sports Economics article rates a feature in Kevin Lewis' Boston Globe column, "Surprising insights from the social sciences."
IN SPORTS, FREE agency has allowed players, especially star players, to earn dramatically higher salaries. This has been good for players, but it also means that team owners have to be smarter in their hiring practices. But are they? An economist examined performance and salary data for all hitters in Major League Baseball who signed free-agent contracts between 1985 and 2004. He found that many teams systematically over-estimated the predictive value of a player's performance in the most recent season, relative to earlier seasons, in setting salary levels. This kind of error was especially acute for older players, and it was generally committed by teams who underperformed relative to their payroll (e.g., Tampa Bay vis-a-vis overperformers like Oakland).

Healy, A., "Do Firms Have Short Memories? Evidence from Major League Baseball," Journal of Sports Economics (August 2008).
Also from Lewis' column: it's good to take an occasional day off from the razor, because the girls like stubble.

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Friday, July 18, 2008

Marcotti: piedi in bocca 

Gabriele Marcotti at SI today:
Many years ago I was taught about the invisible hand and free markets and how, by definition, something was worth whatever someone was willing to pay for it. Of course, I've since learned that it's all a crock of bull. Some markets may work that way, but, in fact, most of them don't.
I infer from this screed that Marcotti's study of markets has led him to prefer the visible hand, centrally planned allocation, and a measure of worth spit out by a bureaucrat's computer.

This punking of economics (later extended to Billy Beane and Moneyball) is prompted by Marcotti's consideration of the transfer prices (and wages) of Ronaldhino, once heralded as the best soccer player in the world, and Ronaldo, who arguably is now. AC Milan just paid $40m for Ronaldhino, a price which is indeed quite puzzling, given his disappearing act last year with Barcelona. Marcotti sketches out some numbers to see if the transfer fee and wages add up to an estimate of incremental revenues, but throws up his hands in the end: "how do you quantify that?" Exactly, which is why Ronaldhino is worth what AC Milan is paying for him.

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Tuesday, July 01, 2008

Play leads to pay 

From the WSJ Econ blog:
Using survey data that followed the lives of thousands of Germans from 1984 to 2006, the German Socio-Economic Panel study, Mr. Lechner found that sports-playing adults saw a boost in income of about 1,200 euros per year over 16 years when compared to their less active peers. That translates into a 5-10% rate of return on sports activities, roughly equal to the benefit of an extra year’s worth of education.

It turns out, according to Mr. Lechner’s calculations, that only about one-fifth of that increase comes as a result of better health. “Although health and other subjective variables contribute substantially to the effects of sports activity, there remains a large unobserved and unexplained component,” Mr. Lechner writes.

Some of that unexplained component could be chalked up to social networking benefits. In fact, the sports-playing men in Mr. Lechner’s study reported a significantly higher level of “social functioning” than did the less active men.
Here is the paper.

Also worth noting, Sam Zell's plan to get the state to purchase Wrigley Field is foundering.

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Monday, June 23, 2008

Is the NBA - NCAA market division in jeopardy? 

Basketball is the one uniquely American game. (Our baseball and football were adaptations of English games). It would be ironic if increasing appreciation of basketball in Europe chips away at the cartelized, market division arrangement that works so well for the NBA and NCAA. The things is, Europe pays more than the NCAA, and they don't have any problem with luring teenagers to emigrate for the purpose of sport. William Rhoden reports:
Brandon Jennings smiled Sunday afternoon when someone suggested that he might be considered a trendsetter.

If he makes good on a threat to go from high school to professional basketball in Europe, Jennings will become the first high school player to spurn college to go overseas and play professionally.

Trendsetting.

This is the latest — and most brilliant — plan yet to combat the three-tiered maneuver by the N.C.A.A., the N.B.A. and the players union to prevent talented high school players from going directly to the N.B.A.

The N.B.A. instituted an age limit of 19, and required that a player be at least a year removed from high school, as part of its collective bargaining agreement with the union. The N.C.A.A. didn’t protest, and why would it?

Under this arrangement, the great high school players have little choice but to do time in college for a season at a high-profile college. Kevin Love wound up at U.C.L.A., Michael Beasley at Kansas State, Derrick Rose at Memphis and O. J. Mayo at Southern California. All entered this week’s N.B.A. draft after one season in college.

Jennings, an 18-year-old from Los Angeles who played the last two seasons at Oak Hill Academy in Virginia, signed a letter of intent to play at Arizona.

Jennings was pushed into action by the N.C.A.A. After doing poorly on his first standardized test, he did well on the second, but because of the difference in the scores, the testing service asked him to take the test a third time. He relented, but at that point Jennings decided that he was through with the N.C.A.A. Why jump through hoops to go to Arizona, endure the charade of an academic regimen, then switch into N.B.A. mode the instant the season is over?
A little European experience might be more beneficial than sitting in Astronomy 101 for these cats, no?

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Tuesday, April 29, 2008

Sports Econ Musings 

A Real-Time Economic Indicator from Sports World: One of my colleagues returned from Talladega, reporting that crowds for the Sprint Cup and Nationwide Series races were way off from last year. He described the Nationwide attendance as sparse.

Free-Agency & MLBPA: Buck Martinez (TBS Analyst for NYY-Cleveland Game)went to some lengths describing the pressure put on C.C. Sabbathia, potentially the marquee free agent pitcher for next off-season, by the MLBPA to follow through and become a free agent rather than resign -- which is what Sabbathia says he prefers. Martinez' imputed rationale for the MLBPA is that getting the top guy on the market sets higher prices for everyone. That's a testable proposition for the sports economists out there with the free agent data sets -- does a higher quality player in the pool raise average offers?

My Ongoing NBA Playoff Beef: (See "Where Hardly Any Game Matters") Sixers beat the Pistons in Detroit, win in Philly, but must win two more to advance and one more to put the Pistons at the very brink of elimination. In spite of the Sixers play, there's been about as much drama as a Seton Hall-Providence matchup. A Celtic-Lakers matchup may be entertaining, but getting there will seem a lot like the WWF.

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Wednesday, January 30, 2008

Arduous Arbitration 

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.

*A set of players with two years of service are also eligible for arbitration.

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