Sign in / Join

Economics and shoe contracts

Ted and co. at the excellent Women's Hoops Blog have been following the story of the shoes and the coaches in Connecticut. The governor is calling for more scrutiny of shoe contracts - worth hundreds of thousands of dollars per year to coaches Jim Calhoun and Geno Auriema - by the state ethics commission.

Ted's post on the subject gets the basic economics right.

Suppose that fair market salary for Geno is $1 million. And suppose that Nike is willing to pay $500,000 in order to have UConn players wear its shoes. Imagine two scenarios.

(1) UConn pays Geno $1 million, and it also contracts directly with Nike to get the $500,000.

(2) UConn pays Geno $500,000, and it also grants him the right to contract with Nike and reap the $500,000 value of that contract.

In the second arrangement, even though Geno contracts directly with Nike, UConn still essentially receives the benefit. So there is no economic difference between the two arrangements.

If Geno is worth $1m, the school can pay him the $1m directly, and retain the rights to collect shoe money, or it can pay him less, and let him have the rights to shoe money.

The economic question then boils down to whether the the transfer of shoe money rights has an impact on any real decisions. This seems remote. Both the school and the coach are interested in winning games, and are unlikely to sacrifice wins for inferior shoes. The school suffers only if the coach diminishes the value of the program or the university through his choice of shoe company, which seems unlikely.

The issue may be purely political, as Ted suggests. The ethics board is in a lather because Auriema and Calhoun did not disclose to them the dollar value of the contracts. Presumably the school knows this, and indeed may have had a hand in negotiating them. My hunch is that the problem will be solved, at least initially, by simply disclosing the contracts' value to the State. The end result is likely to be option (1) in Ted's list, which is common practice at many schools.