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The Perils of Revenue Sharing

This report from ESPN highlights one of the incentive problems associated with revenue sharing. According to leaked financial documents, the Pittsburgh Pirates, despite (or perhaps because of) fielding one of the worst teams in the league, managed to earn large profits in both 2007 and 2008 due to a combination of low payroll and high league revenue sharing. Several sports economists are quoted and all tend to agree that the Pirates are making profit maximizing decisions given the system in which they operate. "If they won and were forced to increase their payroll from $34 million to $75 million or $80 million ... how profitable would they be? There's a ceiling in terms of gate revenues, " said Dave Berri and Roger Noll, a Stanford University economist, follows with, "Probably the Pirates would be less profitable if they tried to improve the team substantially."

So what are possible solutions to this sort of incentive problem given the desire to allow small market teams to compete? At least two solutions present themselves, and perhaps my colleagues or our readers can devise some more.

1. Institute a salary floor (perhaps in combination with a salary cap). While the salary cap gets all the press, the NFL also has a salary floor.
2. Base revenue sharing on market potential rather than actual revenues. Under the current system a small market team that performs well and sells a bunch of tickets get penalized for their success. While a market potential system would not eliminate the incentive problem, it would reduce it. Obviously, determining the market potential share would be tricky.

It should also be noted the Pirates received over $200 million from local taxpayers to build PNC Park. The poor performance of the team has significantly shortened the honeymoon period of the stadium leading to little long-term boost in attendance. Furthermore, it's not clear that spending tax dollars to ensure large profits for the owners and 100-loss seasons for the fans was exactly what taxpayers had in mind.

Update (blame thank Skip...):  Deadspin has posted financial statements for the Pirates, Rays, Marlins, and Angels.  And here in part 2 for the Mariners.

Update 2: A quick look at page 3 of Tampa's financial statement further shows the problem. In 2008, the Rays went out and resigned their young talent, spent an additional $20 million on payroll (a 58% increase over their 2007 spending), went to the World Series, and... made $7 million less than the year before.