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The NFL and the Government Trough

2013 September 23
by Skip Sauer

Fall is the time for young men to battle on the gridiron, and for pigskins to fly through the air. It’s a tremendous athletic spectacle. But there’s another porcine angle to this feast of sport: the image of NFL owners as a bunch of hogs, lined up at the public feeding trough and gobbling up tax exemptions, stadium subsidies, and special legal treatment. These activities are well chronicled in Gregg Easterbrook’s piece in the October issue of The Altantic.

Easterbrook presents a several facts that are new to me, among riffs on familiar topics like stadium subsidies. It’s a good compendium of the ways in which public funds are lavished on the NFL, and other leagues as well. The story is written in a voice which asks “how can this stupid stuff — much of it involving transfers from regular citizens to billionaire owners — continue to go on?” The simplistic but correct answer is that it will continue to take place until political conditions change in a way which makes these transfers sufficiently unpopular. The recent stadium subsidy scorecard suggests that day may yet be a long way off.

A Few Words about the Late Ronald Coase and Sports

2013 September 9
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by Phil Miller

The Nobel laureate economist Ronald Coase died last Monday at age 102.  Coase’s important contribution to economics was in showing the importance of transactions costs in why people make particular choices.

He is most well-known by the “theorem” that bears his name, the Coase theorem.  Developed in his 1960 paper “The Problem of Social Cost“, Coase argued in his “theorem” (named the Coase Theorem later by another Nobel laureate, George Stigler) that when transactions costs are sufficiently low and when property rights are well-defined, then private negotiations can solve the problem of external costs.  He also argued something that he thought should have been obvious to economists:  factors of production tend to be employed where they are valued the most regardless of who has the final say in where they are employed.

In “Theory of the Firm“, published in 1937, Coase argued for the reasons why firms exist as economic units.  He argued that firms exist to minimize the transactions costs associated with being a seller in a market.

Both of these papers have a sports angle that I have touched on in the past.  Sports economists have noted that the basic arguments made by Coase in his “theorem” actually appeared in the seminal article in the field, Simon Rottenberg’s “The Baseball Players’ Labor Market” which was published in 1956.  When Rottenberg wrote his paper, there was no system of free agency in baseball as we know it today.  Instead, players were essentially perpetually bound to their teams by the reserve clause.  Once signed, players gave up the right to be the owner of their talent.  Their teams owned that right, only relinquishing the right when they released players.

The teams argued that the reserve clause was necessary in order to more-or-less equalize the amount of talent between teams and to maintain competitive balance.  Rottenberg, however, was skeptical that the reserve clause was anything more than a way to put a damper on player salaries.  In what we now call the Invariance Hypothesis, Rottenberg argued that whether players had the final say on where they player or if teams had that right, players would tend to play for the teams that valued them the most.  This is why, Rottenberg argued, the history of reserve-clause-era baseball is littered with dynasty teams such as the Yankees of the 30′s and 50′s.

Here are some more of my thoughts on Rottenberg vs. Coase.

I also believe that Theory of the Firm has some insights for sports economists.  In this TSE post, I wrote:

Coase argued that firms, centrally-directed collections of resources, form as a way to lower transactions costs.  They facilitate the costs of searching, information gathering, bargaining, and enforcing contracts.  Firms form to lower the costs of making transactions and thus provide value to their customers.

Where this transactions-costs-lowering argument seems to fit the necessary condition for league formation is in the setting of the various rules that define a sport.  For example, games can be played when the playing rules are unknown beforehand and determined on the spot, but this will generally be uninteresting to fans and frustrating to players.  One can make similar claims about playoff determination and champion definition.  And don’t forget about setting a playing chedule.

Calvinball may be fun to read about in comics, but it would be frustrating to play and watch.

Coase didn’t write a lot of papers, especially compared to the number that some of today’s researchers produce.  He also eschewed the encroachment of math into economics, “blackboard economics” as he called it, believing that it took the human being as the subject of analysis out of the picture, along with the good and bad things that make us humans (see behavioral economics).  So rather than resort to using math to shorten his papers, he wrote words and was sometimes a bit verbose.  But his insights were profound, winning him a Nobel Prize in 1991.

Indeed, JC Bradbury once quipped on Facebook that if Coase had a Twitter account, he’d rarely post, he’d use all 140 characters each time, and they’d be the best posts in the world.

Surely his tweets would have been retweeted thousands of times and debated for a long time.

Coase is now gone, but he will not soon be forgotten.

The $70 Billion Fantasy Football Market

2013 September 6
by Brian Goff

I’m a traditionalist when it comes to my football tastes. I still watch NFL games because of an interest in the teams and the outcome of the game. For millions of others, their NFL interest centers in part or in whole on the statistical production of individual players that make up their fantasy teams. Any visitor to websites like Yahoo Sports or ESPN will find an extensive number of articles focusing on fantasy activities, especially at this time of year with NFL fantasy drafts around the corner.

How big is the market? In terms of actual expenditures, the Fantasy Sports Trade Association – yes, there is a trade association – estimates that 32 million Americans spend $467 per person or about $15 billion in total playing.  Roughly, 11 billion flows toward football. These figures don’t count ad revenue for fantasy hosting sites. The NFL’s annual revenue falls just under $10 billion currently. So the “derivative” market has grown larger than the foundational market.

My primary interest is on the value of time spent on fantasy football activities, which swamp the direct revenues and expenditures.  The FSTA estimates that the average fantasy gamer spends 3 hours per week managing a team(s), translating to 1.2 billion hours for 23 million players over a 17 week season. Of course, all of these numbers are a bit sketchy because of things like drafts addhours along with off-season reading and discussion. Anyway, combining these estimates with a $24 per hour average wage in the U.S. yields a time value of $29 billion per year. Using average income figures from the FSTA for players deconstructed to an hourly wage of $46 increases the estimate up to $55 billion. Added to actual expenditures and ad revenues, the industry amounts to at anywhere from $40 something-billion to over $70 billion per year in tangible and intangible activity.

Sports is unique in culture. There are no “Cereal Fantasy Leagues” with drafts of Wheaties or Grape Nuts. Even in other segments of entertainment, there are no “Movie Fantasy Leagues.” Beyond the fantasy leagues, the amount of time that fantasy leaguers and traditional fans spend talking, writing, and thinking about their times is not trivial.

The size of this market also shows how much the NFL, and other sports leagues, lost in potential royalty revenue when the Supreme Court refused to consider the 8th Circuit’s decision to deny Major League Baseball copyright status for the use of player names and statistics in fantasy leagues. While from a legal standpoint, the decision makes sense in that the data used is publicly available. Nonetheless, from an economic standpoint, the revenues and activities derive from the sporting activities, and even a 10% royalty would have generated a sizable new revenue stream for leagues. In the terminology of economics, this amounts to a “positive externality” – a benefit supplied by sports leagues for which they do not receive (full) monetary compensation.  The NFL does run fantasy leagues on its own site and any licensed use of NFL products generates revenue.  In addition, there is some evidence that fantasy activities increase viewership on the part of players, which, indirectly, benefits the league.

Ranking FBS Coaches

2013 August 30
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by Joel Maxcy

The college football season kicks off this weekend; every squad has a clean slate and most fans have rosy expectations regarding the fate of their favorites. However as the season progresses many teams will disappoint and the head coach will be forced to face the music. In fact it’s likely that as many as twenty of the current group of one-hundred twenty-five FBS head coaches will be replaced before next season. The volatile labor market begs the question, what factors determine success and failure in this extremely well paid but highly competitive occupation?

Head football coaches must be proficient in two primary areas. First they recruit talent, the primary input to success. Just as important, the talent on hand must be utilized to produce wins. The head coach, much like a corporate CEO, assembles a staff responsible for both of these aspects. A fair evaluation of a head coach’s performance accounts for execution in both of these areas. My paper, just published in the Journal of Sports Economics, “Efficiency and Managerial Performance in FBS College Football to the Employment and Succession Decisions, Which Matters the Most, Coaching or Recruiting?”, examines coaches’ performance in both realms and ranks the full set of FBS coaches each year from 2005-2011. The quantification of “talent” is derived from the annual Rivals.com recruiting class rankings. Efficiency is defined as how well each coach uses his resources relative to the average of his peers for each given year.

There are few surprises among the group that most efficiently utilizes talent (see the paper’s table 3); Alabama’s Saban, TCU’s Patterson, Boise State’s Peterson, and Oregon’s Kelly are consistently represented in the top ten for the most recent years. More surprising are those comprising the bottom ten each year. This group is typically populated by coaches at premier programs, and thus able to recruit top talent, but whose teams were coning off mediocre or worse seasons, Texas’ Brown, Georgia’s Richt, Tennessee’s Dooley, and Neuheisel at UCLA, make multiple appearances among this group. Note that a frequent presence toward the bottom of the list typically leads to dismissal, e.g. Michigan’s Rodriguez, Dooley, and Neuheisel.

For the purposes of evaluating recruiting, the efficiency tests control for the football program’s reputation and resources. Even with the controls, coaches at high resource schools rank at the top of the yearly recruiting efficiency lists (table 5). However, that is not a surprise as there are some intangible factors that push blue chips toward these schools and effective coaches in recruiting as well as winning—those are highly correlated—move up to these highest paid positions at high resource programs. LSU’s Miles, Ohio State’s Tressel, and Oklahoma’s Stoops were regulars at the top of the recruiting efficiency list list during the sample period. Likewise some of those who fared poorly in talent utilization, like Richt and Neuheisel, are also frequently near the top in recruiting efficiency. The bottom groups in recruiting efficiency reflect an odd mix; some are coaches from high resource schools who had an unusually low-ranked recruiting class, Iowa’s Ferentz for example. However, coaches of successful lower resource programs, like Peterson and Patterson, are well represented here. Likely those who employ a nontraditional style of play are less interested in the blue chips, those players who are rated highly by the recruit ranking services. Instead they successfully recruit lesser ranked high school and junior college players who fit their particular style of play. Most revealing was the examination of individual coaches’ performances over time. The key finding is the trend among all coaches for recruiting efficiency to wane over their tenure, and this decline leads to eventual dismissal.

Both efficiency factors matter to firing and hiring, although talent utilization carries more direct weight in those decisions. Nonetheless, as recruiting efficiency falls of so does winning, which leads to dismissal. Interestingly, a consistent finding is that the new hires who best use the predecessor’s talent most likely go on to become the most successful coaches.

(The paper’s tables report the top and bottom ten coaches in each category for 2009 -2011 and the full set of rankings are available in the appendix.)

PEDs and Quality of Competition

2013 August 27
by Phil Miller

In a recent TSE post, Brian writes:

The league’s testing procedure (“analytic evidence”) uncovered only 13 users from 2009 to the present. Yet, now there is strong evidence  that many players not only using PEDs, but doing it right underneath the nose of the testing process. Whether through MLB’s feckless attempts or the Player’s Association foot-dragging, the testing procedure is a joke. Players are tested upon reporting to spring training, providing them with full knowledge of the test’s timing. MLB should just include a warning sign to users – if you are using PEDs, then stop or mask them before this date. During the season, the collective bargaining agreement allows for one random test. So, once that is out of the way, a player can supplement with PEDs to their heart’s content without the threat of a test. Of course, cycling and Olympic sports have shown that sophisticated doctors, labs, and chemists can mask PED use quite well even with more randomized tests, but baseball’s procedures don’t even make it difficult.

This raises an interesting question:  why has MLB been feckless in reigning in PED use?  The answer is in the absolute quality of play.

The absolute quality of play refers to the overall quality of competition.  In American baseball, the absolute quality of play is higher in MLB than in the minors.  The higher the absolute quality of play, all else equal, the higher the demand for the sport.

PED’s, well, enhance player performance, making them faster and stronger, and allow players to recover faster from injuries.  If a sufficient number of players use, then the absolute quality of play, as perceived by fans, will improve.  If fans don’t really mind whether players use, we’d expect there to be more demand for baseball and higher revenues for teams.

The increase in fan demand should also be reflected in higher player salaries.  As long as the revenue increase exceeds the salary increase, then looking the other way on PED use is what we would expect.

A Market for Absolutely… repeat… Absolutely Everything

2013 August 26
by Victor Matheson

Companies have long been able to insure their most valuable assets against loss. In sports this means that teams can take out insurance policies that protect them against injuries to their marquee players.

But apparently, player injury insurance is no longer available solely to real team owners but also to fantasy team owners as well. Fantasyplayerprotect.com now allows fantasy football owners to salvage their season in case of injuries to their key players. For example, for a mere $16.50, you can insure a $100 league entry fee against a season-ending injury to Adrian Peterson.

Kudos to the company for providing a market where none existed before, but from an economic standpoint, it is not at all clear that purchasing this type of insurance makes sense. Because insurance companies need to make a profit, the expected value of an insurance contract is always lower than the actual price of the insurance  policy itself. In other words, insurance buyers typically take a loss in expected income by purchasing insurance.

Insurance may make sense from an expected utility standpoint, however, since it protects individuals from large, unaffordable losses. We buy homeowners insurance, not because we plan on coming out ahead on premiums vs. payouts, but because most of us don’t have $300,000 sitting around in the rare chance we have to rebuild a house that burns down. However, if one can afford to take the hit when things go bad, it is almost always best practice to self-insure.

While Peterson going down almost certainly destroys the Vikings’ chance of making the playoffs, it is hard to imagine an Adrian Peterson injury causing “unaffordable” financial hardship for most fantasy owners, and therefore the $16.50 that insurance would cost is probably better spent on beer and guacamole for your draft party.

(Thanks to Ron Gecan for pointing out that there is, in fact, and market for absolutely everything, and to Arnie Quinn for a bit of research assistance.)

Cheating in Baseball and Cycling

2013 August 22
by Brian Goff

In criminal justice studies, the problem of separating actual crime from enforcement policies across jurisdictions is well known. Over the past decade, cycling has suffered from a decade of embarrassing revelations about steroid and other PED use. The suspension of 13 major league players, including one of its all-time sluggers, Alex Rodriguez, it exposes the pitiful weakness of MLB’s testing process and penalties for PED use. Use may have been no less than cycling, just pursued with less vigor.

The evidence in the recent case is best described as  “out of the blue sky” in that it hit MLB in the head through no effort of their own. A former disgruntled employee of the Biogenesis lab purported to have supplied the players with PEDs started the process in motion. To its credit, the league then pursued the case with vigilance by bringing suits against former employees in order to obtain records.

The league’s testing procedure (“analytic evidence”) uncovered only 13 users from 2009 to the present. Yet, now there is strong evidence  that many players not only using PEDs, but doing it right underneath the nose of the testing process. Whether through MLB’s feckless attempts or the Player’s Association foot-dragging, the testing procedure is a joke. Players are tested upon reporting to spring training, providing them with full knowledge of the test’s timing. MLB should just include a warning sign to users – if you are using PEDs, then stop or mask them before this date. During the season, the collective bargaining agreement allows for one random test. So, once that is out of the way, a player can supplement with PEDs to their heart’s content without the threat of a test. Of course, cycling and Olympic sports have shown that sophisticated doctors, labs, and chemists can mask PED use quite well even with more randomized tests, but baseball’s procedures don’t even make it difficult.

Beyond the testing, baseball’s CBA permits only a 50 game suspension for the first positive test. A second positive test incurs a 100 game suspension, still less than a year. At a third test, the hammer comes down with a lifetime ban. Given the extremely low probability of being caught even one time, it’s not hard to see how players tempted by PEDs descend into that pit. If I assume that the likelihood of the testing process catching a user is 1 in 100 (the data suggest its even smaller), a player’s “expected value” of games lost is less than 1.  So, the threat of lost games is trivial. The threat of embarrassment is likely a greater deterrent, at least for some players.

A cynical viewpoint is that MLB’s foot-dragging on PED testing and punishment makes some strategic sense. After all, cycling’s public relations wounds seem self-inflicted through its enforcement. That viewpoint maybe correct, but until recently, it has only been implemented by the cooperation or, at a minimum, complicit actions of the Player’s Association.  All of a sudden, the voices of the anti-steroid players have grown loud.   This heightened degree of peer scrutiny and disapproval may prove a stronger deterrent to use than the current or even stiffer policy.

Is the NCAA too Big?

2013 August 14
by Phil Miller

Here’s a lengthy excerpt from an interview with Missouri AD Mike Alden published in the Columbia Daily Tribune:

Q: Should the NCAA take another look at its stance on amateurism?

A: I think it’s healthy to do that. I think if you step back and say, “No, we’re not going to touch that,” it’s a different age today. Now, you might not change anything. I have no idea. But should they step back and have the membership and others take a look at that and say, “Hey, do you really want to rethink this model?” Sure. It’s no different than when we relaxed all of those regulations on men’s basketball, allowing unlimited texting, and everybody thought, “Oh my gosh, this is a whole different thing.” Shoot, that’s worked out fine. It’s been good for the prospective student-athletes, it’s been good for the parents, it’s been good for the coaches, it hasn’t given anybody a competitive advantage, so I think that it’s really healthy to analyze your entire organization regularly, and I think amateurism would be an issue that you should look at and say, “Do we have the right model? Is there some tweaking, some adjustment we can make here.” …

It’s no different than asking, “Should we take a look at an additional division within Division I?” I happen to think that you should. I think that there are 60-70 schools that are different than everybody else in Division I. Different than anybody else and I think the time has probably come where we need to recognize that, that what goes on Michigan State is different than what they have to deal with at Eastern Michigan. It just is. What happens at Illinois is different than what they deal with at Illinois State. So let’s recognize it, let’s admit it, and let’s just say, “OK, let’s find the commonalities of those 60-70 schools and let them deal with some of the issues they need to deal with” while at the same time there are other common denominators that all of us have to deal with — whether it’s amateurism or whether it has to do with minimum hours toward graduation or standardized test scores, whatever that may be. All of us should have to deal with that. But I do think the time has come for us to look and to admit that there are 60 schools to 70 schools that are different than everybody else.

Q: That was going to be my next question was about the fourth division. Part of the problem at the core of this is that they in the last 20 years, made it so easy to move to Division I. Did you have a sense as that whole process was going on, that this was getting too big?

A: It’s funny you say that because 15 years ago I was the athletic director at Texas State, an FCS, I-AA football program. Their aspirations always were to be Division I — Division I-A. Now, I was there. I’m living this. Texas is right down the road. I’m living in a stadium of 95,000 people at that time. Now it’s over 100,000. I’m thinking, “It is so much different at Texas than it is at Texas State. Why should we even imagine that we should be Division I-A?” The answer generally that you’ll see is that we want to associate with I-A so we can look like them. We can get the afterglow effect, the ability to be able to be touched by it. So when you saw that happen and when you saw Louisiana-Monroe saying, “This is what we need to do,” when you saw Arkansas State saying, “This is what we need to do” and you saw UT-San Antonio. And again, that’s not to offend them. That’s just the reality of that.

There couldn’t be anything more different than night and day between Texas State and the University of Texas. There’s nothing. So when you saw the gravitating, going from 110 programs to 112 to 116 to now 120, whatever.

Mr. Alden makes a point that I have felt for a long time: the NCAA, especially Division 1/FBS, is simply too big.  The economic differences (i.e. willingness to pay for tickets, to donate, etc.) between the fan bases of, say, the top tiers and lowest tiers makes the current NCAA structure an unstable equilibrium.  What will it look like in 15 years?  Only the shadow knows.

The Tampa Bay Rays Make Another Run

2013 July 30
by Duane Rockerbie

The Tampa Bay Rays are definitely an economic anomaly in Major League Baseball (MLB). As of July 30, 2013, the Rays are in first place in the American League (AL) East, sitting just a half game above the Boston Red Sox in an exciting pennant race. Yet the Rays payroll of only $57 million pales in comparison to $159 million payroll of the Red Sox (source). This is not another Moneyball story, rather, the Rays just seem to have a really good farm system that keeps producing productive players. This is a story about the Rays attendance and poses the question how long can the Rays ownership survive in Tampa Bay? Stuart Sternberg, owner of the Rays, was quoted in 2011 as saying

 

“When I came in here in ’05 and ’06, I saw the stars, and I was confident that we could put a winning product on the field — and I was told by you guys and others that all we needed was a winning team. Well, we won. We won. We won. And we won. And it didn’t do it.”

 

Sternberg is referring to profit when he referred to “all we needed was a winning team”. Sternberg made significant investments in talent for the start of the 2007 season and the payroll jumped to $57 million. The results began to show in the 2008 season when the club won 97 games, clinching the Eastern division pennant but losing the World Series in 5 games. Unfortunately the tremendous success did not translate into fan interest and the club experienced only a modest improvement in revenue for 2008, but did move up somewhat compared to the MLB average revenue. The Rays made the playoffs again in the 2010 and 2011 seasons with the payroll reaching $80 million in 2010. But revenues did not keep up and profits shrank to levels below the 2005 season (it is quite likely that the Rays benefited from baseball’s revenue sharing agreement much more in 2005 than in 2010). By the end of the 2011 season, Sternberg gave in and cut the Rays payroll to $40 million.

 

The Rays are a strong contender in 2013 to win the AL East pennant and move into the playoffs. Sternberg upped the payroll by acquiring all-star reliever Jesse Crain from the White Sox on July 29 and they appear to be gearing for a pennant run. Unfortunately Ray fans have not responded at the gate. Per game attendance is down by 2,860 from the 2012 figure and the Rays have the second lowest attendance in MLB (source) only slightly above the far-worse performing Miami Marlins, despite the Rays having a better winning record compared to this point last season. What gives in Tampa?

 

The standard economic model of a professional sports league is not working in Tampa. Revenue is a function of winning in that model, so attendance should be surging and so should revenues at the single equilibrium the model assumes. Putting aside the notion that Sternberg only receives utility from the satisfaction from winning (see the quote above), the model needs to be overhauled. Or does it? It is simple to augment the standard model to generate more than one winning equilibrium: small market clubs can have a low and a high winning equilibrium, but only the low equilibrium achieves the globally highest profit. Steve Easton and I generate such a result in our forthcoming book (Springer) that is based on our 2010 paper published in the Journal of Sports Economics. The burning question is why a profit-maximizing owner would wish to move to and stay at the high equilibrium, even though it is only a local profit maximum? Revenue sharing helps the Rays for sure, but that can’t be enough. We suggest some answers, citing the Hubris effect, the desire to have the local government build a new stadium, or that owners care more about maximizing the sale value of a club rather than current profits. If all this fails, then Rays fans had better start supporting the team or the team could leave (maybe the fans don’t care). All good for me since there are rumors of a potential owner with deep pockets owing a team in Montreal. Les Expos?

Economic power and sports success

2013 July 29
by Victor Matheson

Yesterday the US Men’s national team wound up a successful Gold Cup, the biannual North American soccer championship, by beating Panama 1-0 in the title match. The US win was an all-time record 11th in row for the Americans who dominated the tournament from start to finish. While the US does not have a particularly strong soccer tradition, winning the title came as no surprise. Since the tournament began in 1991, the US has a 48-6-7 record in the tournament, has won the championship 5 times, and has another 4 second place and 2 third place finishes to its name. There is one simple reason for the Americans’ success: economics.

There is a fairly lengthy scholarly literature on the relationship between sports success and economics. Whether one looks at medal count in the Olympics or FIFA rankings for either men’s or women’s soccer, there is a strong correlation between population, GDP, and GDP per capita and sports success. A large population gives a country a large pool of potential athletes from which to draw, and a high GDP or GDP/person gives the country the resources required to adequately train its athletes.

Thus, it should actually come as no surprise that the US is the dominant soccer-playing country in its region. It has a GDP five times larger than the rest of North America combined and a population that also exceeds the rest of the continent. Aside from the US, only Mexico, a six-time winner of the Gold Cup, is consistently a real challenger for regional supremacy, and again it is all about economics. Excluding the US and Canada, Mexico’s population is larger than the rest of the continent combined and its economy is roughly three times bigger. Indeed, Canada, with the region’s second largest economy and third largest population, is currently the real underachiever.

So, kudos to the Americans for their on-going win streak and latest championship, but let’s keep things in economic perspective. Aside from a nice win against economic and soccer power Germany to begin the streak, the American’s last 10 wins have come against countries with a combined GDP of roughly the same size as Boston’s.