Santa Anita Park and Racetrack Economics
Today is opening day at Santa Anita Park. Located at the foot of the San Gabriel Mountains, the “Great Race Place” is one of the most beautiful sporting venues in the world. But the view looking forward is not so rosy.
Santa Anita Racetrack
Reporter John Cherwa presents some of the issues facing Santa Anita and American horse racing in today’s Los Angeles Times. A “fix-it man,” Tim Ritvo, has been dispatched from the Florida headquarters of The Stronach Group, owners of several horse racing venues including Santa Anita. Ritvo is quoted as saying “the problems are bigger than I thought,” and he clearly recognizes that the larger problem is industry-wide. According to the American Racing Manual, the number of races run in the U.S. has fallen to 41,277 from its 1989 peak of 74,701, a decline of 44%. The industry decline has been concentrated among smaller racetracks and slower horses, as alternative forms of gambling proliferated and diminished local demand for cheap racing. Making matters worse, field size per race has fallen even faster than the number of races, from 9 runners per race in the 1950-1990 period to about 7.5 today. Smaller field sizes make betting the races less attractive, generating lower betting handle and contributing to horse racing’s downward spiral.
Ritvo’s charge is to keep the industry’s slide from engulfing Santa Anita. Tracks with top level racing and well-defined seasons — — Del Mar and Saratoga in the summer, Keeneland in the spring and fall — have been able to maintain their luster and their business despite horse racing’s headwinds. But at Santa Anita, racing has been reduced from five days to four days per week, and Ritvo has introduced the possibility of concentrating the races even further, to three days per week. Since racing is a time-intensive leisure activity, losing a Thursday card and replacing it with fuller fields of additional races run Friday through Sunday makes economic sense, at least at some level. Thursday racing would not be a great loss to most stakeholders in racing, especially if a better product results from running when fans will be more attentive to the sport.
But Ritvo brought up one issue that has always puzzled this economist. The norm in the U.S. is for tracks to provide stalls to horsemen for the horses that train over the racecourse. There is not an explicit monetary cost to horsemen for the stalls; rather, the quid pro quo is that the track expects horses stabled on the premises to compete in the races there. Incentive conflicts arise, however, when horses stabled at one track have better racing opportunities elsewhere. Tracks respond to this with rules which limit the ability of horses to ship in and out in pursuit of optimal racing opportunities. The is counterproductive from an industry perspective and contributes to lower field size and betting handle. The incentive conflict doesn’t exist in British racing, where the horses are generally stabled at home and entered to race wherever they please, with no racecourse holding sway over that decision.
Ritvo is concerned that horses that train at Santa Anita often don’t race there. This will be the case for the two favorites for the Breeders’ Cup Classic, Arrogate and Gunrunner, who are preparing at Santa Anita for the race that will be held at Del Mar in November. Horses entered in graded stakes races are generally exempt from restrictions on shipping out to race, sensibly so. But this case nicely illustrates the problem of a track bearing the costs of stabling for horses that don’t race often, if at all, during the afternoons. The two mares who are favorites for the Breeders’ Cup Distaff also exemplify an industry-wide problem: Forever Unbridled and Stellar Wind both plan to train up to Distaff without a prep race, having run only twice and three times respectively this season. That’s a problem for racing too: can you imagine a world in which soccer fans got to watch Lionel Messi play just a few times each year? No other sport hides its stars as much as American horse racing.
The problem of stabling horses for training that rarely race seems easy to address however. As pointed out earlier, the problem is absent in places where horses are stabled in the home training facilities of their trainer. It would be a non-issue here if American racetracks charged a fee that accounted for the costs of stabling. Horsemen pay for the costs of shipping, feed, vet care etc., so why not make stabling costs explicit as well? This would be a significant step towards minimizing the incentive conflict. Moreover, the stabling fees could be funneled directly back into the prize money offered on raceday. Pricing the resource properly, and adding to the incentive to race at the track seems such a simple solution to this problem. It’s Econ 101. But horse racing as an industry repeatedly exhibits a strong aversion to simple economic principles. Perhaps that’s another reason contributing to its steady decline on the sporting scene.
Corruption in college basketball – a result of not using the price system to allocate player talent
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.
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)
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
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.
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?
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.
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.
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
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.
