College Coach Rents

Andrew Zimbalist has a column in the most recent (1/16/2006) Sports Business Journal on the salaries of college coaches, especially those in football and men’s basketball:

One question I always get: Why are the top Division 1-A football coaches paid $1 million to $2 million (and sometimes more) when the top-paid college presidents are paid $400,000 to $800,000?

The standard rationale in the trade is supply and demand. That answer begs the question.

Think of it this way. How much do you think MLB managers would be paid if every major league team was exempt from taxes, was supported by million-dollar operating subsidies from both a university and a state budget and the players’ salaries were constrained by law to be no higher than $40,000 annually (roughly the value of a full grant-in-aid at a top school” And, further; if the team president were told that the more he pays his manager, the more he will get paid.

This is in effect, what happens to college athletic directors with their football and basketball coaches.

The answer lies in the fact that each team would have gads of money that they could not use to compete over players. Instead, they would use it to compete over managers.

Basically, Zimbalist argues, a good portion of the high salaries enjoyed by college coaches is economic rent – payment to a resource over and above what is necessary to have it employed at all.

Salaries to players and coaches are just part of a larger pot of cash: the revenues generated by the “sale” of athletic contests. A related problem that must be solved is the division of the pot: who gets how much? In an ideal world, we’d be able to perfectly identify what each dollar of revenue was spent on.

Suppose that a football team (with one coach) generated $3,000,000 in revenues and that $2,000,000 was spent to watch the home team players play, $500,000 was spent to watch the coach strategize, and $500,000 was spent to experience the stadium. In an ideal world, each resource is paid what it contributes to revenues: the players get $2,000,000, the coach gets $500,000, and the owner of the stadium, presumably the school, gets $500,000.

But because the production of goods is an extremely complex and intricate web of coordination activities, we can’t begin to approach perfect identification of what each resource contributes to revenue.

But then comes complicating factors: income restrictions, for instance. In college athletics, the primary “resources,” the athletes on the field, have huge restrictions placed upon what they can receive in exchange for providing their athletic talent – restrictions placed in the name of amateurism. These restrictions do nothing to the size of the pot, which is determined by fan willingness to pay, but instead limit how the pot can be divided.

In prescription, Zimbalist suggests the following:

I don’t begrudge people seeking whatever the market will pay them. But given that (a) the market for college coaches is rigged by tax exemptions, subsidies, etc.; (b) paying the head coach more than the school president sends the wrong message about a university’s priorities; (c) the star athletes on the basketball and football teams are not allowed to receive a cash salary; and (d) resource allocation would not be affected by a salary limit rule for coaches, it would make eminent sense for the NCAA to pass such a rule limiting head coaches’ compensation.

While this prescription would solve the problem of rents enjoyed by coaches and would send a more appropriate signal to the public regarding the mission of a college, it still has some problems. First, the size of the pot will remain unchanged. People will still go to and spend money at games and the pot must still be divided. If payments to one resource are restricted, then there is more in the pot available for some other resource.

If we restrict payments to players, more of the pot will be available for coaches and athletic directors as economic rent. If we restrict payments to coaches as well, then a greater amount is made available to athletic directors as economic rent. It’s quite possible, then, that instead of worrying about excessive pay of coaches (relative to college presidents), we would then worry about excessive pay of athletic directors.

If, as a response, we restrict payments to athletic directors, then a greater share of the pot becomes available for college presidents. While this arrangement sends a more appropriate signal to the public, the extra share – still generated by players – is still rent for whoever received it. It’s no prettier for athletic directors or college presidents to obtain rent generated by the skills of underpaid athletes than it is for college coaches.

Moreover, since the revenue is generated by the athletes (and coaches), it is also likely that the some portion that would go to players would, instead, go towards providing some non-salary form of compensation – facilities, for example. Therefore, it quite possibly could end up in the hands of construction contractors and their workers: the “owners” of resources that expand and improve athletic facilities and, thereby, help recruit athletes to a school.

So while the prescription will help send a more appropriate signal to the public, it won’t solve the underlying problem: the “resources” fans pay to see cannot be paid a sum commensurate with what they generate.