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Corruption in college basketball – a result of not using the price system to allocate player talent

2017 September 28
by Phil Miller

Like most other fans of college sports, particularly the money sports of football and mens’ basketball, I have grown accustomed to the sporadic scandals that seemingly pop up every year.  For instance

  • Assistant coach so-and-so gave impermissible benefits to such-and-such player.
    • Already happened.  The guilty party got a slap on the wrist.  Move along.
  • A booster of program X gave internships to several prominent athletes but had them do no work.
    • Already happened.  That national championship Program X won, yeah, we’ll pretend it never happened. Oh, and you, Program X, you lose a scholarship.  Move along.
  • Several football players at a major university got free shoes from a store in the mall.  That is an impermissible benefit.
    • Already happened.  Slap on the wrist, effectively.  Fans started calling the university Free Shoes U.  Move along.

But when one of my students told me about the latest scandal in major college basketball involving the arrests of coaches by the FBI, my first thought was “Whoa.  The FBI arrested coaches.  This isn’t a slap on the wrist by any means.  This is serious.”

Michael McCann, writing at Sports Illustrated, has an excellent take on some of the legal angles in this current corruption case, and he speculates on what the various parties involved might do as the case winds through the legal system.  But as for the genesis of this scandal, and most every other scandal that comes to mind, Mike hits the nail on the head: it didn’t have to happen.

 If the NCAA had adopted a system where players were compensated for their labor and compensated for the use of their name, image and likeness, perhaps all or some of these “under the table” payments would not have occurred. We’ll never know. But some will ask.

Therein lies the problem.  Football and mens’ basketball generate mountains of cash that run entire athletic departments (i.e. support the livelihoods of numerous people), but the athletes are effectively not compensated anywhere near the amount generated by their programs.  Yes, they get grants in aid (scholarships) which are incredibly valuable to some players.  But they can have no value whatsoever to some players, particularly those with a future in an elite pro sport league.

In college basketball, one 5-star recruit can be the difference between a run in the NCAA tournament and not making the tournament at all.  Talk about a valuable resource.

Elite athletic talent is a scarce resource and it must be rationed.  It’s not a question of “does it need to be rationed?”, it’s a question of how.  If it’s not rationed through a simple and efficient price system (i.e. by paying players some kind of salary more or less in line with their worth to their respective school – paying them “over the table”, as it were), then some other rationing system must be used.  One of the alternatives is payment “under the table”: i.e. corruption.

 

NCAA coaches charged with fraud and corruption

2017 September 26
by Kurt Rotthoff

Hmm, am I shocked? No, not really. However, I am a little shocked that it was the Feds that caught them.

Student-athletes are worth a lot of money to the schools and the brands that sponsor the schools. As such, we expect there to be a strong incentive for places to find ways to convince these student-athletes to go to their school (or brand). And schools have always done this through relatively inefficient means: nicer locker rooms, weight rooms, and other facilities; hiring personal chefs and personal trainers; and even paying professional coaches to leave the big leagues and come down to the NCAA to coach (recently Harbaugh, now at the University of Michigan).

ESPN reports that NCAA basketball coaches that have been arrested for paying money to get players to play for different schools. Athletic apparel companies (technically people working for them) are also claimed to have done the same thing, steering the athletes to schools that are represented by their particular brand.

So, although the NCAA claims that all these student-athletes are amateur, there are some getting paid (seeming large sums of money) to play at certain schools. This is another form of inefficient payment (and this time it is not legal). My biggest problem with this is the same I have with giving take-home quizzes: I give a take-home quiz and say you can study, but close all your notes before you take it. Those that are the most well prepared are most likely to take the quiz with their notes closed. Those that are the least well prepared are most likely to take the quiz with materials open (although this is not allowed). When this occurs, and some of those that were the least well prepared do well on the quiz, it incentivizes people to act more like that (keep their notes open when they shouldn’t be). Thus there are two issues: 1. Monitoring is hard. 2. The incentives lead more people to act inappropriately. Which is typically what we are trying to avoid in our society. So I given in-class quizzes, eliminating the monitoring problem (mostly) and taking away the ease of cheating.

So what would be a solution for the NCAA? Well, the easiest one would be to get rid of the inefficiencies. Right now the NCAA inefficiently pays student-athletes. Do college students want their own private chefs? I would like one, but I am not willing to pay for one; I would prefer the money over the chef (and I would venture to guess most, if not all, of these student-athletes would say the same thing). Thus the obvious answer is to pay the student-athletes. However, the NCAA has always come out against this to protect the amateurism rule. But doesn’t it seem ironic that the ones who vote on (and support) this rule the most have the most to lose? If athletes can get paid, they don’t need inefficient payments anymore – thus there would not be as many, or as highly paid, coaches and athletic directors (which are some of the main voting parties). This seems like a Bruce Yandle “Bootleggers and Baptists” argument (although it’s not clear there are any actual Baptists here, just people claiming to be Baptists).

Am I missing something?

Tax Deductible Two Part Tariff (at least the first part)

2017 September 22
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by Phil Miller

From the Chicago Tribune:

What I don’t understand, however, is the law that allows ticket buyers to write off 80 percent of their “preferred seating donation” as a charitable contribution for federal tax purposes.

That’s right. High rollers in the swankiest suites can subtract $4,500 from their taxable income, a benefit worth up to $1,782 off their tax bill, as though they had given that money to a soup kitchen or hurricane relief.

Put another way, for each such privileged fan, the federal government effectively provides a $1,782 ticket subsidy.

<snip>

Now, normally, under tax law, if you get something in return for a donation to charity, you can only deduct from your income the amount of your donation above the value of what you’ve received. If you pay $500 a plate for a charity dinner, for example, and the meal is worth $50, you can only claim a charitable contribution of $450.

Pretty simple. Pretty obvious.

And, in the mid-1980s, when these preferred-seating donation scams first arose, the Internal Revenue Service issued a common-sense ruling that a mandatory donation linked to the purchase of seasons tickets was a quid pro quo and so not deductible for tax purposes.

Legislators representing schools in the powerful Southeastern Conference “went crazy,” said University of Illinois emeritus law professor John D. Colombo, a specialist in tax laws governing charitable organizations. And in 1988, Congress added subsection 170(l) to the IRS code that specifically allowed for an 80 percent deduction on donations to “institutions of higher education” that granted “the right to purchase tickets for seating at an athletic event.”

The pro sports analogy to this collegiate two-part tariff, at least here in the States, is the personal seat license (PSL).  Fans buy a PSL from a team which essentially gives them the right to buy season tickets to that team’s home games.  Would it be OK to allow PSL buyers to deduct 80% of the PSL price from federal income taxes?  Of course not, because there is no facade that pro sports teams are charitable organizations.

If an organization is classified as a “non-profit” for tax purposes, this only means that it is a non-profit in an accounting sense.  It does not necessarily follow that the “non-profit” cannot seek maximum economic profits.  It just means that they have to show a zero accounting profit on their books.

I think it is pretty clear that major college football (and basketball) programs, if not athletic departments in general, are profit-maximizers in the economic sense.  You can call them non-profits, charitable organizations, or whatever.  But just because they are non-profits for tax purposes does not mean they aren’t profit-maximizers.

Via Skip Sauer on Twitter

Operating Losses in the NBA

2017 September 21
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by Phil Miller

From an article entitled “A  confidential report shows nearly half the NBA lost money last season.  Now what?” from ESPN.com:

Despite a flood of new national television cash, 14 of the NBA’s 30 teams lost money last season before collecting revenue-sharing payouts, and nine finished in the red even after accounting for those payments, according to confidential NBA financial records obtained by ESPN.com.

The article itself is very interesting and the authors touch on many things that I talk about in my Sports Economics classes.  In any case, I am skeptical of the claims of widespread financial losses of major sports teams.  The authors touch on this.

The players union and its economists have long claimed that teams use accounting techniques to make them appear less profitable than they really are. The union, which is focused on basketball-related income more than teams’ balance sheets because that is what determines their split, has the power to review some team’s books by conducting its own audit of five teams per season. It rarely exercised that power until 2015. According to several sources familiar with the matter, the union audited five teams for the 2016-17 season. The new CBA will allow it to audit 10 teams, starting this season.

Years ago, Deadspin obtained and published financial statements of so-called small market (i.e. small demand) baseball teams and showed, not surprisingly, that even teams from little markets make healthy profits despite claims to the contrary.

NBA link via Omoleso Ogunnowo.

Risky Girls?

2017 September 18
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by Kurt Rotthoff

This news article in Popular Science caught my eye: “Girl soccer players are five times more likely to return to the game after a concussion than boys”.

“After parsing through two years of data on concussion patients, Miller and his team found that girl soccer players, on average, were five times more likely to have returned to the field that same day as boys were, and that overall, 40 percent of the players—both boys and girls—continued playing on the day they were injured.”

The data sample is small (87 kids aged 7-18), but it is my understanding from (mainly) the behavioral finance literature was that boys, in general, were more risky and girls were more risk adverse (please let me know if I am wrong). This article seems to imply the opposite. Are girls more risky at some things, or are we just not measuring this well in certain areas?

Kurt W. Rotthoff as new Contributor at The Sports Economist

2017 September 11
by Kurt Rotthoff

I am happy to join the great group of Sports Economists that post here at The Sports Economist. A day before I wrote my first post, someone had brought to my attention an interview I did in the San Francisco Chronicle titled “Do college football coaches earn their million-dollar keep?” from 2015. Given that the interview is two years old, I first wonder what I said; then I wonder (more importantly) if what I said then is what I would still say today.

Here is what I said:

“Imagine a booming business, but only the top 20 people make money — none of the other workers are allowed to get paid,” said Kurt Rotthoff, an associate professor of economics and finance at Seton Hall University. “These players are on the field performing and bringing the fans. But they’re not allowed to get paid while bringing in more and more money.

“That money has to go somewhere — and a lot of it ends up in the coaches’ pockets.”

Later in the article:

And that was before the Buckeyes and coach Urban Meyer ($4.5 million annually, sure to balloon) won the national title Monday night over Oregon. So are skyrocketing salaries — 11 coaches make at least $4 million annually — simply capitalism at full throttle? No way, Rotthoff argued.

“Any organization that disallows payments to people is not any form of capitalism,” said Rotthoff, the professor who specializes in the study of sports finances. “It’s the antithesis. In a capitalistic world, the players would negotiate their own salaries. It’s a regulated monopoly system.”

I am happy to say I would say the same thing today. Although I am excited about the start of another college football season, this issue still exists (and is getting larger as football generates more revenues).

I look forward to continuing to post on research in the field, topics of interest, and thoughts that will (hopefully) promote discussions in the comments.

NAASE sessions at the 2017 MVEA’s

2017 April 6
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by Phil Miller

Michael Davis, Nick Watanabe, and I are organizing North American Association of Sports Economists (NAASE) sessions at this fall’s Missouri Valley Economics Association (MVEA) annual meeting.  This year’s meeting is scheduled for Oct. 26 – Oct 28 in Kansas City, Mo at the Marriott Country Club Plaza.

If you are interested in presenting, you can submit an abstract to me (phillip.miller@mnsu.edu), Michael (davismc@mst.edu), or Nick (nmwatana@olemiss.edu).  You can also contact any of us for more information, and please share this information with your colleagues and students.

The deadline for submissions is August 11th, 2017*, but the sooner the better.

Lastly, the MVEA has a cash award for the Best Graduate Student Paper, so we also encourage submissions by graduate students.

*The original post listed the year as 2016.  It also listed the date as August 16th.  Both the date and the year are now correct.  My bad.

My Remembrance of Bob Tollison

2017 February 15
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by Skip Sauer

Public Choice will be publishing a collection of remembrances of Bob Tollison. Here is my contribution, “Robert D. Tollison: Father of Sportometrics, Friend and Colleague.”

Despite what the NFL will tell you, hosting the Super Bowl is not good for a city’s economy

2017 February 5
Comments Off on Despite what the NFL will tell you, hosting the Super Bowl is not good for a city’s economy
by Skip Sauer

Here’s my piece at the Washington Examiner on the simple economics of the Super Bowl: http://washex.am/2jPxOxJ

 

Bottom line:

Mega-events displace other economic activity, business visitors, conventions, and other travel to the host city that would have taken place but go elsewhere during Super Bowl week. That’s why there’s not a single published academic study — and there have been numerous attempts — which finds a measurable uptick in local economic activity or tax revenue of any Super Bowl in the history of the NFL…..

The Super Bowl manages to throw off hundreds of millions in cash to the NFL, a few hundred million in vigorish to bookmakers, and millions again to the creative geniuses on Madison Avenue. This all happens every year, no matter where the game is played. For residents of the host city, however, only a small minority will notice an impact on their wallets. For those who go to the game, it could take a while to pay the bill.

Robert D. Tollison

2016 October 27
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by Skip Sauer

Robert Tollison was a great economist, and as nice a man one could ever meet. Bob passed away suddenly on Monday morning at the age of 73.  I’d like to share a personal remembrance of him, and to highlight his work in sports economics, to which he made many significant contributions.

I met Bob for the first time at the 1989 meetings of the Southern Economic Association. I had read several of his papers during my grad school days, and by then he was the Duncan Black Professor of Economics and Director of the Center for Public Choice at George Mason. I remember well being introduced to Tollison and him saying in his soft but steady voice, “It’s nice to meet you. I read your recent paper in the JPE. It’s a very good paper.” Cigars were lit and liquor flowed that night but I was already on cloud nine.

On to sports.  Bob was a sportsman as well as an economist, and it was quintessentially natural for him to combine the two passions.  He played basketball for Wofford College, and later with friends and colleagues.  He was a big fan, particularly of the Clemson Tigers, and followed the games closely.  But he was a sharp critic of the NCAA, and was involved as an economic expert for three decades in litigation which challenged a number of the monopolistic practices of the college sports cartel.  Much work remains to be done on this front, but the victories of college athletes in the courtroom are due in part to Bob’s work on their behalf.

bob-t-at-work

Bob at work

Of course, it was Bob’s scholarship on the economics of sports that put him in position to attack the NCAA. He had a nack for being early on the scene of emerging fields in economics and he thus helped define them.  His 1992 book with Arthur Fleisher and Brian Goff, The National Collegiate Athletic Association: A Study in Cartel Behavior catalogued a variety of NCAA policies which had more to do with suppressing economic competition than enhancing competition on the field itself.  

Earlier, he and Brian edited and contributed to Sportometrics (1990), a book which more accurately captures Bob’s approach to sports economics, indeed economics in general.  Bob defined sportometrics as “the application of economic theories to the behavior of athletes in the real world to see if we can explain what they do, and to see if what they do can help us explain the behavior of people in other professions.”  Since then there have been scores of sportometrics papers, some published in the most prestigious economics journals.  But Bob was there first.  His 1984 paper with Bobby McCormick in the JPE, “Crime on the Court,” exemplifies this.  When the ACC added a third referee to conference basketball games in 1978, the experiment offered an opportunity to explore Gary Becker’s model of the economics of crime and punishment, using fouls called on basketball players.  The added referee increased the probability that a foul would be detected.  Hence if actual fouls were unchanged, the number of fouls *called* in a game would increase.  But player behavior is likely adapt to the increased probability of being called for a foul, and the number of actual fouls would decrease as a result.  McCormick and Tollison found that the number of foul calls decreased by over 30% with the addition of the third referee, suggesting that this policy innovation resulted in a cleaner game.  The NBA followed suit in 1988 by adding a third referee to its games.

This just scratches the surface of his work in a field of study he helped to create. I’ve created a list of his contributions to sports economics which you can see here.

I’m lucky and privileged to have had Bob as my colleague at Clemson for the past 13 years. His door was always open. His desk had a crossword puzzle on it more often than not, but if you walked in to his office you had his full attention. You were never more comfortable talking with a scholar than when you were with Bob.  He did more in his life than most would accomplish in a dozen lifetimes, but he has gone too soon, and we will miss him like no other.  Bob loved The Sports Economist blog, and I know he’d be happy to be remembered here.

championgolfers

Bob Tollison, Mike Maloney, John Warner and Skip Sauer, “Champion Golfers” with their prizes.

P.S.  There are a number of appreciations of Bob Tollison that have appeared.  David Henderson’s recollection of his time at the Council of Economic Advisers — “Bob Tollison was the best boss I ever had”  — is unique and particularly good.  Also good and informative is the appreciation by The Public Choice Society. Mike Maloney is collecting these and posting them on his webpage.