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Is Revenue Sharing Working?

During Game One of the World Series Tim McCarver claimed that revenue sharing in baseball is working. His evidence – baseball is crowning its seventh new champion in seven years. McCarver – and others – interpret the outcome of baseball’s playoffs as evidence of increased parity. Furthermore, this increase in parity is attributed to Major League Baseball’s “share the wealth” plan.

The revenue sharing – league parity story goes as follows:
1. Rich teams give poor teams money.
2. Poor teams now spend more on talent, rich teams now spend less.
3. As payrolls become more equal, teams become more equal.
4. Poor teams now win more, rich teams now win less.

That’s the story we are being told. The data, though, tells a different story.

From 1996 to 2000 the New York Yankees won the World Series four times. “Baseball has a competitive balance problem” was the cry heard throughout the land. The only solution was some mechanism to control the growth of salaries and re-distribute baseball’s wealth from the rich – i.e. the Yankees – to the poor.

The 2002 labor agreement – which was just extended to 2011 – was designed to resolve these problems. A luxury tax on high payrolls was enacted. This tax – primarily paid by the Yankees – was designed to restrict spending by large market teams on players. The agreement also focused on revenue sharing, which gave small market teams more money.

Payrolls in the American League have not quite responded to this agreement. From 1999 to 2002 the coefficient of variation for league payroll – standard deviation divided by the mean – was 0.44 in the American League. From 2003 to 2006 the coefficient of variation rose to 0.54. In other words, after the 2002 agreement payrolls became less equal.

What has happened to competitive balance? The standard deviation of winning percentage in the American League was on average 0.083 from 1999 to 2002. From 2003 to 2006 it averaged 0.084. In other words, increases in pay disparity did not dramatically change competitive balance.

If we look at the National League we do see evidence that pay has become more equal. The coefficient of variation in pay has decreased from 0.37 from 1999 to 2002 to 0.33 from 2003 to 2006. And the National League has become a bit more competitive. The standard deviation of winning percentage from 1999 to 2002 in the National League was an average of 0.073. From 2003 to 2006 the average fell to 0.065.

Was this change due to the 2002 agreement? From 1995 to 1998 the average standard deviation in winning percentage in the National League was 0.066. In other words, just about what it was the last four years.

Commissioner Bud Selig tells us that the 2002 agreement has ushered in a “golden age.” If by “golden age” he means an era of pay equality and competitive balance, then the data doesn’t seem to agree. Team payrolls are even less equal today and the level of competitive balance appears to be about the same.

The reality is that competitive balance improved in baseball during the 2oth century as the population of available athletes expanded. And the improvements occurred well before the 2002 agreement. For the mechanism of how this works, please read chapter four of The Wages of Wins (shameless book plug, sorry about that). Or perhaps I will comment on this at our blog – The Wages of Wins Journal (another shameless plug, sorry again). In the last thirty years the standard deviation of winning percentage in both leagues has changed very little. Yes, payrolls have increased dramatically, but competitive balance remains basically the same.

So is this a “golden age” of baseball? If by “golden age” we mean the Yankees are not winning the World Series every year, then I guess that is true. But one should not be confused about how that trick was pulled off. The true trick happened when baseball expanded participation in the playoffs. Since 1995 the team with the best record in baseball has only won the World Series once. And that is because the best team now has to navigate three playoff rounds to win the title.

The revenue sharing plan, which put more gold in the pockets of small market teams, may have made the lives of some owners come closer to a “golden age.” But it is hard to see how this altered the level of parity we observe in the National Pastime.

Update: For those who are interested, I posted a few more comments on competitive balance at The Wages of Wins Journal.