♪♫I just got paid today, got me a pocket full of change♫♪
Last week saw the day by when arbitration-eligible players and their teams had to exchange final offers in Major League Baseball. Baseball uses a variant of what is known as final offer arbitration, a type of arbitration (suggested by economist Carl Stevens in 1966) where the arbitrator renders a decision restricted to being one party’s offer or the other’s. The word “final” is a misnomer in MLB since players and their teams may continue bargaining until a decision is rendered, so those offers really aren’t final.
One of the many interesting facets of baseball arbitration is what happens to players up for arbitration for the first time. Mr. Buster Posey: your present experience may take the stand.
• Buster Posey: one-year, $8 million with San Francisco Giants
In his first year of arbitration, reigning National League MVP and two-time World Series champion Buster Posey received a hefty pay raise, going from $615,000 to $8 million. Despite his accolades, that’s a higher figure than most were expecting, but it’s likely this is just a precursor to an extension as the two sides are expected to begin negotiations soon. He’s under Giants control through 2016 regardless of that outcome.
If Posey is under Giants’ control for the next few years (meaning he is subject to the reserve clause), then why did he get nearly a $7.4M raise? Part of it is that apparently the two sides are looking at a multi year deal according to the article, and part of it is that Posey is just that good of a player. But a big part also depends on how baseball arbitration per-se is structured.
Players with less than 6 years of major league service are subject to the reserve clause, meaning that they are bound to their teams by the terms of the collective bargaining agreement (CBA). Reserved players with at least 3 years of service are reserved, but they have option to go through baseball’s arbitration system. So-called “super two” players, players with two years but less than three years of service, can also go through the system. To be a super two, a two year player must be in the top 22% of service time of all two year players with at least 86 days of service. Players not eligible for arbitration are simply bound by the reserve clause.
The threat of arbitration, and its expected outcome in any particular case, drives the bargaining for arbitration eligibles. According to baseball’s CBA, arbitrators can examine particular-defined criteria when rendering a decision (the quality of the player, his compensation record, disabilities of the player, the non-financial performance of the team, the length and consistency of the player’s career, and comparable baseball salaries). It is that last one that is the biggie.
Arbitrators are given a list of comparable players (as defined by the CBA) and their salaries. In any given case, “comparable” players may not have any more than one more year of experience than the player in question. But for players in their first year of eligibility, there is a chain linking the free agent market to arbitration-e;igible players’ salaries. Players comparable to 5 year players include first-year free agents, 5 year players are comparable to 4 year players, and and 4 (3) year players are comparable to 3 (2) year players.
When players just become eligible for free agency, the typical salary jumps. According to data from 2001 gathered by Dan Marburger, the average salary jumped by approximately 150% while the average salary of 3 and 4 year players nearly doubles. Since arbitrators may consider comparable salaries, the effects of the free agent market get passed down to arbitration eligibles. an showed that just becoming eligible for arbitration drove the average salary of that class of players from just under $500,000 to nearly $1,200,000, about a 240% jump.
Posey is but one example. He was set to get a big payday anyway had his case gone through the formal arbitration process. Rather than go through the headaches of the process, Posey got his nice payday and now he has a pocketful of change.
It is pretty widely understood that sports programming drives live television these days. The Nielsen ratings for broadcast networks during the week of December 24 provide some recent data. Nielsen’s table, reproduced below, shows that NFL broadcasts were the four most watched telecasts that week (“The OT” is Fox’s NFL post-game show).
Prime Broadcast Network TV – United States
Week of December 24, 2012
Rank Program Network Rating Viewers (000) 1 NBC SUNDAY NIGHT FOOTBALL NBC 17.0 30,281 2 SUNDAY NIGHT NFL PRE-KICK NBC 12.2 21,911 3 OT, THE FOX 10.2 17,813 4 FOOTBALL NT AMERICA PT 3 NBC 8.8 15,901 5 BIG BANG THEORY, THE CBS 7.4 12,013 6 60 MINUTES CBS 6.5 10,265 6 PERSON OF INTEREST CBS 6.5 10,326 7 NCIS 12/25-SP(S) CBS 6.1 9,836 8 TWO AND A HALF MEN CBS 5.7 8,621 9 CRIMINAL MINDS 8PM-SP(S) CBS 5.4 8,564 9 NCIS: LOS ANGELES 12/25(S) CBS 5.4 8,622 10 ELEMENTARY CBS 5.2 8,055
Source: Nielsen. Primetime Broadcast Programs (source page, which is updated to current weekly ratings with a lag).
On cable and satellite the story is the same. The top ten list for cable during the week of Dec. 24 is dominated by the much maligned college football bowl games. Virginia Tech – Rutgers (ugh!) and and Duke – Cincinnati are among six bowl games on that week’s top ten list for cable.
Amidst this general background, consider the recent LA Times piece on the rising cost of sports programming, a trend which is expected to continue. The main point of the piece is that when tv programming is served in a bundle, consumers who don’t like specific components of the bundle end up paying for a service they don’t consume. Continued increases in the costs of sports programming threaten the sustainability of a pricing system that is allegedly already burdened with inequities, since consumers who don’t watch sports will presumably drop their subscriptions by the thousands.
The problem is that the main point of the piece is probably wrong. At Marginal Revolution, Alex Tabarrok presents the simple arithmetic for a hypothetical bundle offered to consumers with differing tastes for sports and non-sports programming. This is a neat example and exposition. The bottom line: each consumer gets what she pays for.
There are many hypothetical bundles however, so it is possible that a lack of perfect competition allows some combination of the leagues, networks, and carriers to set prices which subsidize those who watch (and provide) sports entertainment by selling bundles which extract consumer surplus from viewers who don’t watch sports. My own personal experience is somewhat different. I view with amazement the occasional offer of a low cost bundle of networks in the $40 range (ESPN included), alongside my monthly bill which is north of $100. On close inspection, the difference is revealed: a la carte consumption of various sports channels! I wonder if my base package is subsiding viewers of Masterpiece Theater.
The simplistic alternative offered to bundling is a la carte pricing, across the board: choose whatever combination of tv networks, individually priced, that you want! This is a durable proposal, often recycled but rarely implemented. There is probably a reason for this. As Tom Hazlett has pointedly argued, it is telling that we don’t see very much a la carte in cellphone pricing, internet service, satellite radio, or on the ski slopes. Market power is not pervasive, and across many markets we find consumers opting for, rather than out of bundles when given the choice. There are efficient reasons for this. Hazlett’s 2006 article in the J. of Telecommunication and High Technology Law, “Shedding Tiers for A La Carte” explains why.
It is possible that continued increases in the value of sports programming among aficionados would shift some sports packages out of the basic tier bundle, for the same reason that caviar is never offered as a free topping on a hamburger. Non-sports viewers would then have no complaint. At that point the howling would come from fans unwilling to pay the market price for sports.
James Surowiecki writing about Mark Sanchez at the New Yorker:
After a farcical 2012 season, in which the New York Jets invented ever new ways to lose games (thus the “butt fumble”), the team’s general manager, offensive coördinator, and quarterback coach are all gone. Yet Mark Sanchez, the starting quarterback, remains. He has played poorly for two seasons in a row, and has now thrown more interceptions in his career than touchdowns. But the Jets have invested an enormous amount of energy and money in Sanchez, and, assuming that no one will trade for him, they are contracted to pay him $8.25 million next year, whether he plays or not. So figuring out what to do with Sanchez will be trickier than you might think.
The Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way).
Here and here are two definitions of sunk costs, both of which IMHO don’t go far enough because they only consider past costs sunk. Generally speaking, I think Surowiecki has it more accurately. A cost is sunk if it cannot be avoided. Whether the cost has already been paid is irrelevant. What matters is can it be avoided if a different choice is made. With guaranteed money committed to a player, whether that player sees the field in meaningful duty, that money is essentially gone/kaput/sunk.
Why then would franchises play players based on supposedly sunk costs? For one, there is the desire not to waste.
Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad.
Surowiecki notes that the more someone has invested in a project, the greater the belief that it will work out for the best. If you wonder why your struggling team stays with it’s high draft pick when there is a competent back up already on the team, this may be why.
Then there is the concern for reputation.
“Giving up on a project, though, means that somebody has to admit that he shouldn’t have done it in the first place,” Arkes says. “And there are lots of executives who would rather be tortured than admit that they’re wrong.”
This reason is interesting because it suggests that by going through with a decision, the person is avoiding an expected reputational hit. Even if the costs are sunk, the hit to the reputation is not. Depending on the circumstances, sticking to one’s guns may be fully rational.
No doubt you’ve ran across the bizarre saga of Notre Dame linebacker Manti Teo and his fictional girlfriend. If not, see here.
The fact that Deadspin broke this story and not one of the legacy sports media, like ESPN or Sports Illustrated, is also a bit bizarre to me. With their legions of staff, why did it take so long for the story to come out and why at Deadspin? No offense to the folks at Deadspin, but I expect more out of the major sports media.
The political analogy I thought of was the John Edwards story which the MSM declined to investigate and which was finally broken by The National Enquirer. In that case the reason why the MSM did not poke around in Mr. Edward’s business was political, but what explains the inaction of the MSSM in the Teo saga?
The State of Minnesota had hoped that new electronic gambling machines would provide the necessary revenue to pay for the state’s share of building a new stadium for the NFL’s Vikings. Those funds are (unexpectedly!) are not materializing.
Tax revenue from those games is supposed to fund the state’s $348 million share of the $975 million Vikings stadium slated for downtown Minneapolis. But the tax revenue from the games, which started to become available in September, fell short of projections by about half through the end of 2012: While $35.2 million was projected to come in, the games returned only $17.2 million in tax revenue.
We’ll have to keep an eye on this to see if things pick up or not. Various people with a skin in the game are preaching patience, and that may be all that’s needed. But if not, what does the government do if reality continues to fall short of projections?
Related to the prior post on managerial decision making, Jim Harbaugh has finally won over almost all his critics for his decision to hand the starting QB job to Colin Kaepernick as Jim Trotter from SI.com discusses. For me, the most interesting part of this is Harbaugh’s willingness to flout conventional thinking and management his resources. Replacing your winning QB with an young and untested QB is the kind of thinking that will get media and former players screaming if it doesn’t work out, just like going (and failing) for 4th down on your own 30 yard line. Just ask Bill Belichick.
Whether the decision goes their way or not, Harbaugh and Belichick are coaching based on the evidence (practice and game observation in Kaepernick’s case and analytics in Belichick’s fourth down case). For most coaches, it is a combination of the evidence plus what others will say and think (or, put equivalently, what is conventional). Taking the conventional route may be wrong, but it doesn’t generate the howling of an analytical but unconventional move.
The 49er game is a case in point. Mike McCarthy chose to punt the ball back to the 49ers down by 14 and facing 4 and 5 at the Green Bay 49 yard line, yes, and the fact that the Packers had already given up 38 points. This analytically dubious decision has barely made a ripple in the media. (Advanced NFL Stats has a calculator that shows it to be favorable to go and it doesn’t even factor in the above average porous defense for the Pack). Instead, Pete Carroll’s decision to go for it on 4th and 1 in the second quarter of the Seahawks-Falcons game has attracted much more attention, although analytically correct as ANS discusses.
Ran across a recent piece on the evolution of Jason Garrett’s playing calling by Jonathan Bales of DC Times (an analytics based blog on the Dallas Cowboys and the NFL).
When I first began studying Jason Garrett’s play-calling in 2009, perhaps his most blatant tendency was allowing previous play-calls to dictate his current ones. That was particularly true on second down, when Garrett would often run if he had passed on first down and pass if he had run. The thinking, in all likelihood, was to “mix it up” in order to keep the defense guessing. In attempting to randomize his play-calling, however, Garrett was quite ironically becoming extremely predictable. You can consult my previous studies of Garrett’s second-down calls to see just how predictable he had become.
This harmonizes with an NBER paper by Kenneth Kovash and Steve Levitt on a wide set of pitch data from MLB and play calling from the NFL. Rather than well mixed plans, they find evidence of correlation from one decision to the next. However, Bales finds that from 2010 onward, Garrett’s play calls across plays have become randomized better:
To Garrett’s credit (or perhaps more so to the credit of the analytics team the Cowboys brought in after that season), the coach’s second-down play-calling improved dramatically in 2010. It’s been above-average ever since.
Analytics becomes information not only about the other team but about one’s own behavior that can improve behavior.
The lament of the hockey fan (and fans of other sports) whose favorite league and its union finally reached an agreement that many thought would have been reached in similar form a long time ago. What took so long? What idiots! Billionaires fighting with millionaires. The fans get hosed. Grumble grumble. Dagnabbit dangblabbit!!
In an article about Don and Steve Fehr, Sam Mellinger of the Kansas City Star gives us a general reason that any labor economist will recognize as a key finding in the academic research on why labor disputes occur.
“They’re (the players – Phil) impossible not to like,” he says. “They’re impossible not to respect.”
The feeling is mutual, especially after Fehr called what showed to be a management bluff in December and helped strengthen the union. Players like Bruins defenseman Andrew Ference have called hiring Fehr the smartest thing they’ve ever done. Together, the Fehrs and players navigated a tense negotiation that at times threatened another NHL season — seven years ago, long before the Fehrs were involved, the league canceled an entire season — but ended with a deal that most neutral observers see as a victory for the players.
What Mellinger notes is that the dispute went on so long because of asymmetric information. One side (or both sides) has information that the other side doesn’t have, but that the other side would like to have. Since a labor dispute, be it a lockout or a strike, imposes costs on both sides, one way to get that private information revealed is by letting negotiations go to dispute.
In any event, the players’ union was weakened considerably in the lockout of 2004-05, and they eventually fired their union head. They needed to bring in a union head who could bring strengthen the union and try to even things out with the owners. They got that with the Fehr brothers.
Nobel laureate James Buchanan has died at the age of 93. Well known for his work on public choice, he also developed a model of clubs that can help us sports economists understand the working of sports leagues and college conferences. I did just that in this post from a couple of years ago when college conference realignment was just getting revved up.
Sports leagues can be thought of as clubs. To enter any club, permission must be obtained from the incumbents, which means a sufficient number of them must be made better off by the entrant. Similarly, the entrant has to be made better off by joining the club. If it is mutually-beneficial, we’ll see entry into the club.
Buchanan helped us understand that people working together are still primarily motivated by self-interest, and his insights enriched the discipline. RIP James Buchanan.
This afternoon, MLB.com posted the results of this year’s Hall of Fame balloting. This has been an ongoing interest of mine partly because of the hotly debated views on steroid use on TSE as well as the lingering question as to how much people (fans, media, …) care about steroid use. I don’t know that HOF voters reflect fan interest all that closely, but the HOF voters care about the taint of steroids. Two players who were at one time certain first balloters, Barry Bonds and Roger Clemens, both received about 36 percent (I would like to know who voted for one and not the other) or less than half of the 75% needed for induction.
- Bashing but without the gaudy numbers of Bonds or McGwire paid off. The Astros’ Baggio and Bagwell led position playes with 68% and 59%. What’s tough in the steroid era is telling users from non-users. These two players, who I liked a lot, didn’t put up the 60+ homer years to draw extra attention, but, then again, there numbers may have been inflated relative to their performance, if they did use.
- The percentages for Bonds and Clemens while far below the HOF entrance threshold points to some conflicted voters. Mark McGwire collected only 17% and Rafael Palmeiro garnered less than 9%. So, several voters inked in Bonds and Clemens who did not these other players. Possibly, that might relate to the high level of their performances before steroid use is suspected to have become widespread.
- Will voters soften? They haven’t on McGwire who originally pulled 23.6%. On the other hand, this year may have been an especially untimely year for steroid-tainted players given the negative publicity from the Lance Armstrong suspension.