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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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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Thursday, March 13, 2008

The strange world of the NFL Salary Cap 

If you write player contracts with incentive bonuses that are likely to be met (i.e. with application, effort and good fortune), you create cap room for next season. Paid bonuses -- normally a happy, desirable outcome of incentives -- reduce allowable spending in the following year. Enter crafty management, and incentive clauses purposefully designed to not be attained. And coaching decisions to ensure this result when cap room next year is more valued than your best effort now. I detect a slight whiff of rent dissipation: the cap creates rent for the owners, and the accountants dissipate it. Reuben Frank has the details.

Via Newmark's Door.

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