As Doug Pappas has chronicled, Bud Selig has been wandering the country making the claim that various teams can't be competitive in their current ballparks. Selig's proposition implies the following chain of effects: a new ballpark increases revenue, the revenue increase will be spent on talent, and the talent increase will make the team more competitive. Is this proposition true? As an economist, I'm naturally skeptical, but willing to consider Selig's claim in the light of logic and evidence.
I like the new ballparks, don't get me wrong. So do lots of people, hence they increase demand to attend games, and the revenue increase is real. But will these revenues be spent on increasing the team's talent? Economics implies they will only if the new stadium increases the revenues from winning additional games. If this effect is absent - i.e. if nicer accommodations and a more competitive team are not complements - then a profit maximizing owner will just pocket the cash and the composition of the team will be unchanged.
Colleagues Jahn Hakes and Chris Clapp (Jahn's student) have examined this question. In a paper forthcoming in the Journal of Sports Economics, they document the extent of the "honeymoon effect" of new ballparks on attendance and revenue. However, "contrary to expectations, there is no systematic interaction between new venues and team performance upon attendance or stadium revenues. This non-complementarity implies that a profit-maximizing owner would not use a new stadium's revenue stream to increase team quality of play."
Craig Depken of UT Arlington has looked at a similar question. What happens when teams sell corporate naming rights to the stadium? Typically, this yields a nice boost of a few million per year in revenue. Do owners plow this revenue into higher payroll? He's quoted in this story on the Rangers' sale of naming rights to The Ballpark in Arlington:
The hope that Rangers management might use the $2.5 million annually due the team under the 30-year Ameriquest deal to buy some great talent is probably a pipe dream, said Depken: He crunched some numbers this year to see whether teams that sold naming rights had higher payrolls. "There is no difference," said Depken, whose calculations covered the late-1980s-to-2000 seasons. "The owners are putting the difference in their pockets."
Economic reasoning thus does not imply that increases in ballpark revenue will be invested in player talent. Better seats, improved sightlines, and general ambience could be complimentary with player talent, but there is no systematic evidence of this effect. Further, as Hakes and Clapp show, the "honeymoon effect" on attendance is of limited duration. The sale of naming rights is more clear-cut. This is a pure cash windfall, and should have no impact on the marginal returns to talent. Depken's work confirms that it doesn't - owners simply pocket the cash.
There is a case to be made for investment in new stadiums, but not the one made by Selig. I started with a question, and I'll end with one for you to consider: Who does Selig think he's fooling?