Transcript ppt

The Underpayment of
Restricted Players in North
American Sports Leagues
•Provide a comparison of the underpayments across MLB NFL and NBA
•Hypothesis: Restricted Players are Underpaid
• One buyer, many sellers
• Drives demand down
• How have the players responded?
• Unions
• Veterans are favored
How Do You Measure a Player’s Worth?
•Are players overpaid?
•Economists: Salary in relation to revenue generated for the team
• Ex/ Salary= $2.5 million and revenue generated = $1.2 million
• Best players are underpaid the most
• Marginal Revenue Product: The amount a player is worth
• Marginal Product and team’s Marginal Revenue
• Compare MRP to actual salary to find surplus
• Free-market: substitute player’s free agent salary for MRP
• Journeymen: Full MRP
• Apprentice : 25% of MRP
•Compute MR of a win
• Free agents wage reflects his MV to his team
• Player bid reflects how many more wins he can bring to his team
• Ex/ NFL RB
• Result: Competitive bidding results in talent allocated to it’s best fit team
Player Value
• MLB: OPS (on-base percentage + slugging average)
• NBA: Efficiency metric
• NFL: Total yards and touchdown’s from passing, rushing and receiving
• MRP: Measurement of contribution to team success
• Free agents will earn their MRP
•To estimate the surplus (underpayment) of restricted players, compare restricted player’s imputed MRP to actual
• Surplus >0: underpaid
•League differences impact surplus size
• MLB and minor league system
• NFL and NFL Europa
• NBA D-League
• NBA teams don’t rely on financials as much
• MLB negotiating power
• Reserve players
• Monopsony
• Drafted NFL and MLB players negotiate contracts
• NFL injuries
• NBA salaries non negotiable
Underpayment in MLB
• Sample of 308 potential free agent hitters from 1997-2002
• OPS= OBP + Slugging Average
• Variables: position, market size Dummy : Starters vs. Utility
• Performance has a high economic influence on salary
• Market size T-Stat = 1.98
• Apprentices: Median surplus $1.2 mil, 19% of MRP
• Journeymen: Median surplus $221K, 86% of MRP
• What does this mean?
• Bargaining power
• Best players
Underpayment in NFL
•Sample of 308 free agents from 2004-2005 season
◦ QB, RB, WR, TE: Total yards, Touchdown’s, fumbles and interceptions
QB: Passing and rushing touchdowns, passing and rushing yards
Non-QB: rush and receiving touchdowns, rushing and receiving yards
Performance is based from prior season
Starters vs. Utility players
•Non QB Yards and QB Touchdowns highly significant and positive
• Non QB Touchdowns and QB Yards insignificant
•Apprentices: Median Surplus $492,000, 50% of MRP
•Journeymen: Median Surplus $264,000, 75% of MRP
•**Consistent with MLB, the higher the productivity, the higher the surplus
Underpayment in NBA
•Sample of 378 free agents who signed multi-year contracts from the 2000-2006 seasons
•Variables: Player performance (efficiency), market size, and position played
•Dummy: Center, Power Forward, Small Forward and Point Guard
•Market size nor bench players are correlated to free agent salaries
•Premium for Centers and Power Forwards
•Apprentices: $732,000, 66% of MRP
Cross-League Comparisons and
•Results consistent with Hypothesis
• Restricted players are significantly underpaid
• Surplus falls as players gain negotiation power
• Largest surpluses from players who create the most value
•The amount of surplus differs from each sport
• MLB initially thought to have the largest surplus
• NBA starters
Major Conclusion
• Owners exercise monopsosy power whenever and wherever they can!
• Young, restricted superstars