Redistribution is No Free Lunch

In the April issue of the Southern Economic Journal, John Solow and Anthony Krautmann explore the effects of 1995 MLB agreement whereby 17% of all local team revenues (including broadcast revenues for the first time) were shared with the league. The authors ask, “Leveling the Playing Field or Just Lowering Salaries?” They bill their investigation as testing Rod Fort’s earlier proposition that redistributing from rich to poor teams lowers the incremental value of winning for all teams, resulting in lower salaries than would be found without revenue sharing. In their own words:

Our results indicate that redistribution lowered salaries by approximately 22% without affecting league balance.

As always, there are caveats. This is just one study looking at MLB over 1996-2001. As the authors suggest, examining outcomes since the 2002 CBA raised the shared percentage to 34% and imposed a luxury tax will be useful.

Nonetheless, the study provides a specific confirmation of what makes a lot of sense — that you don’t make players more (or as) valuable by holding back incentives for the better teams. Yet, owners have been successful in selling this idea to rank and file players (as well as the media) and getting them to sign on to CBAs in a variety of sports that restrict player salaries in different ways.

The study has implications for the renewed debate about income disparity and related political appeals based on class envy. One would think that the idea that lower earning individuals living standards will be improved primarily by limiting or redistributing from the top would have been put to rest by comparing GDP per capita performance in the U.S. and Europe over the last 30 years (especially on purchasing power adjusted basis). At least in sports, there is a chance that revenue sharing will raise competitive balance and that this will raise overall demand for the league — two big “ifs” but still possibilities.