Transcript Pay and Performance in Major League Baseball

Pay and Performance
in Major League
Baseball
GERALD W. SCULLY
THE AMERICAN ECONOMIC REVIEW, VOL. 64, ISSUE 6, DEC. 1974
Background
Baseball bringing in substantial revenue. Salaries are the main part of
contract negotiations and the reserve clause gives considerable power
to teams.

First players’ strike over pension fund.1972

Threat of strike, lockout from issues of minimum salaries, salary cuts,
benefits, and the reserve clause. 1973

Reserve clause retained a player’s rights to his team after contract’s
expiration. Abolished in 1975
Reserve clause system ruled the game. It dictated how and where
players moved between teams. Owner say clause is “necessary for
equalization of playing strength among teams” and insist that player
salary demands are unrealistically high. Scully disputes these contentions.
“Purpose of this paper is to crudely measure the economic loss to the
players due to restrictions of the reserve clause. Relationships between
player performance and salary will be estimated and the predicted
salary compared to predicted player marginal revenue product.”
Scully, p. 915
Approach
“Aside from providing insights into the operation of
a particular labor market, the approach differs
from other studies of the wage determination
process in the following ways: 1) the individual
player is the unit of observation; 2) salary functions
are estimated within the framework of a labor
market characterized by extensive bargaining; 3)
marginal revenue products of the factors of
production are estimated explicitly: and 4) rates
of monopsonistic exploitation are found by comparing salary and marginal revenue product over
various performance levels and career lengths.

The individual player is the unit of observation.
Players have various performance levels and
career lengths

Salary functions are estimated within a
monosponistic labor market characterized by
extensive bargaining

Marginal revenue factors are estimated explicitly
“First, the institutional characteristics of the baseball players labor market are briefly outlined. Next,
with this institutional framework in mind, a model of
marginal revenue product and salary determination is formulated. Then, the results of the
empirical investigation into marginal revenue
product and salary determination are presented.
Finally, the rate of monopsonistic exploitation is
calculated and policy implications discussed.”

Exploitation found by comparing salary and MRP
Scully, p. 915
1) Outline characteristics of the labor market
2) Formulate an empirical marginal revenue
product and salary determination model
3) Present results
4) Calculate monopsonistic exploitation
5) Discuss policy implications
Organization of the Baseball Players
Labor Market (more about the reserve clause and MRP)


Player is a free agent until a one year contract is signed

Contract is exclusively renewable for the owner (reserve clause)

Owner may renew, sell, or terminate the contract

Player make accept the terms or negotiate

After owner’s “final offer,” player must accept or withdraw from professional
baseball
MRP is “the ability or performance he contributes to the team and the
effect of that performance on the gate receipts. The effect of a player
performance on revenue may be direct or indirect.”

“Ability contributes to team performance and victories raise gate receipts—
and broadcast revenues; this is the substantial effect of the individual’s
performance.”

“Some players may attract fans over and above their contribution through
the team.”
Scully, p. 916
A Simple Model of MRP and Salary
Determination in Major League Baseball
The MRP and salary determination model should consider: 1) revenues
are related to individual performance through their effect on team
standing; 2) the reserve clause reduces player salaries below player MRP

W = Percent wins

Ai = Player skills

Ii = Nonplayer inputs (managers, coaches, capital, etc.)
W = W ( A1, A2,…, An; I1, I2…Im)
A Simple Model of MRP and Salary
Determination (cont.)
Teams derive revenue from gate receipts and broadcast rights, which are
directly related to the team’s percent wins and population in the area






R = Team revenue
p = Ticket price
T = Number of tickets sold
W = Team performance
Pi = Potential broadcast households
B = Broadcast revenues

W = Percent wins

Ai = Player skills

Ii = Nonplayer inputs (managers, coaches, capital, etc.)
R = p · T [ W ( Ai, Ij ), Pa ] + B [ W ( Ai, Ij ), Pb ]
i = 1,…, n; j = 1,…, m)
A Simple Model of MRP and Salary
Determination (cont.)
Costs are determined by the level of skill and nonplayer inputs. Because
of the monopsonistic labor market, costs are related to the level of skill

C = Team costs

Si (Ai ) = Player supply functions

rj = Nonplayer factor remunerations
C = ∑ Ai Si (Ai ) + ∑ rj Ij
i = 1,…, n; j = 1,…, m)
A Simple Model of MRP and Salary
Determination (cont.)
Standard profit model

𝜋 = Profit

R = Team revenue

C = Team costs
𝜋 = R-C
A Simple Model of MRP and Salary
Determination (cont.)
First-order conditions for a maximum profit are obtained by differentiating
with respect to Ai (player skills) and Ii (nonplayer inputs)
“Conditions reveal that teams maximize profits by selecting a level of
player skills and nonplayer inputs such that players receive a salary equal
to their MRP less monopsony rents (Ai S’i ).”
Scully, p. 917
Player MRP Equation1
MRP shall be determined by 1) player performance on team wins and 2) the effect of wins on
revenue.
Estimated with team data for 1968 and 1968

PCTWIN = Team percent wins · 1000

TSA = Team slugging average

TSW = Team strikeout-to-walk ratio

NL = Dummy variable; 1 = the team is in the National League

CONT = Dummy variable; 1 = divisional winners and their closest competitors at the end of the season, if
competition was five or fewer games out

OUT = Dummy variable; 1 = teams which at the end of the season were twenty or more games out of placing
PCTWINt = 37.24 + .92 TSAt + .90 TSWt - 38.57 NL + 43.48 CONTt - 75.64 OUTt,
(.39)
(4.37)
R2 = .88, DF = 38; t = team
(5.62)
(4.03)
(3.77)
(6.17)
Player MRP Equation 2
MRP shall be determined by 1) player performance on team wins and 2) the effect of
wins on revenue.

REVENUE = Home attendance times average ticket price plus revenue from broadcasting
rights

SMAS = Population size of the Standard Metropolitan Statistical Area

MARGA = Team specific attendance

NL = Dummy variable; 1 = the team is in the National League

STD = Dummy variable; 1 = older stadiums in poor neighborhoods and with limited parking
facilities

BBPCT = Percentage of black players on the team
REVENUEt = - 1,735,890 + 10,330 PCTWINt + 494,585 SMAS70 - 512 MARGA
(1.69)
(6.64)
(4.61)
+ 580,913 NL CONTt - 762,248 STDt - 58,526 BBPCTt
(1.84)
R2 = .75, DF = 36; t = team
(2.42)
(3.13)
(4.28)
PCTWIN

The coefficient of primary interest in PCTWIN. A one pint increase is
estimate to raise REVENUE $10,330. A one point increase in TSA
(slugging avg.) or TSW (strike-to-walk) raises PCTWIN by .92 and .90

However, MRP may be overstated. Omitted factors may include
managerial quality, entrepreneurial player drafting and trading
abilities, and stadium investment
Individual Player’s MRP

“To obtain the individual player
MRP, assumptions have to be made
about how individual performance
affects team averages.”
Scully, p. 921
Assume individual performance
carries no externalities (team
performance is simply the linear
summation of individual
performance)
 Gross MRPs show that even
mediocre players contribute
$200,000 to team revenue. Star
players easily have MRP double that
amount

Salary Determination

Is offensive or defense more important?

Hitting or pitching performance

Weight of contributions

Star players
Salary Determination (Hitters)

SA = Slugging average

M = Years experience in the majors

DBA = Dummy variable, 1 = Players with below average
lifetime Slugging averages but above average lifetime
batting averages. Controls for excellent hitter who have
low slugging averages.

AB = Total lifetime at bats / number of years in the majors
times 5,500 (average season at bats for a major league
team)

SMSA, MARGA, and NL to control for monopoly
Salary sample is nonrandom and biased toward the upper
tail of the salary distribution. There are 148 observations from
1968 and 1969. Salary range is from $10,000 to $125,000
Salary Determination (Pitchers)

SW = Lifetime strikeout-to-walk ratio

M = Years experience in the majors

IP = lifetime average percentage of inning pitched
out of a total innings

SMSA, MARGA, and NL to control for monopoly
Salary sample is nonrandom and biased toward the upper
tail of the salary distribution. There are 148 observations
from 1968 and 1969. Salary range is from $10,000 to
$125,000
Degree of
Monopsonisitic
Exploitation of
Professional Ball Players

Players are generally exploited and to a
large degree

Over a career length, average players
receive salaries equal to about 11% of their
gross MRP and 20% of their net MRP

Star players receive about 15% of MRP

Some mediocre players have salaries in
excess of their net MRP
Policy Implications

Place ball players under a contractual arrangement similar to pro
football. A player can play out his option and become a free agent.
Player-initiated transfers would still not exist

Long-term contracts. Contracts for 5+ years, followed by free
agency

Completely free labor market will all contracts for a full season
negotiated off-season. Eliminate economic rents of players.
Questions

What is the reserve clause?

What is a monopsony?

In the win model, what are the two independent variables?

Player MRP is determined by 1) the effect of A on B, and 2) the
effect of B on C. What are the variables?

What two categories of players were evaluated for salary
determination?

Are professional baseball players exploited?