Archive for August, 2010

Revenue Sharing, Incentives, and Competitive Balance

Rob Neyer takes issue with the conclusions of my NY Times column on revenue sharing and competitive balance, in which I suggested MLB abandon revenue sharing for the purpose of aiding competitive balance.

I can’t say that I’m convinced, but then again I can’t say I’m objective, either. Because it makes me happy to see the rich giving to the poor. It makes me happy to see the Yankees and the Red Sox writing checks to the Rays and the Royals.

Also, Bradbury’s argument isn’t terribly convincing. Maybe competitive balance hasn’t improved with more revenue-sharing … but that doesn’t mean it wouldn’t be worse without revenue sharing. Bradbury points out that the balance has hovered around 1.8 — as measured by the Noll-Scully ratio — since the early ’90s … but can anyone prove that it wouldn’t be lower than 1.8 without revenue sharing?

Maybe someone can. Economists love to play around with models. But I haven’t yet seen a model that gets the Rays into the playoffs twice in three years without a little help. And I suspect they’re happy, this year at least, with Commissioner Robin Hood and his Merry Men.

Let me clarify a few things and extend my argument to possibly convince Rob and other skeptics that revenue sharing isn’t a useful policy instrument for manipulating competitive balance. 800 words isn’t a lot of space to make an argument, and the book chapter which contains much of my argument is too long to include here. Although, as the son of a newspaper editor, I have to admit that I have a soft spot for short policy pieces.

First, I am not opposed to revenue sharing, per se. As a collective profit-maximizing entity, MLB may find guaranteeing payments to all franchises, regardless the level of locally-generated revenue, is the optimal business strategy. By having teams in Pittsburgh, Miami, etc., MLB receives media attention and retains interest in baseball among potential fans in the area. Even if local receipts aren’t sufficient to keep the franchise in the black, the net benefit to the league is positive. Therefore, in order to encourage an owner to own and operate a franchise in the area, a subsidy may be required. I have no problem with such an arrangement, nor do I have a problem with owners pocketing such transfers.

Where I see the issue as problematic is when we tie revenue sharing to competitive balance. Below is a revenue function that I have estimated for an average MLB team, based solely on winning. The left-side of the function shows “the loss trap” bump that I highlight in the article, which is consistent with revenue sharing creating a disincentive to win. However, the bump is slight, and I don’t think it’s even necessary for explaining why revenue sharing hasn’t improved competitive balance (more on that in a moment). The fact that earnings are relatively flat until wins reach the mid-80s in wins means that there is very little incentive for poor-and-losing teams to invest any money into the club. Whether that money comes from transferred wealth or a pot at the end of the rainbow, investing the funds into a club doesn’t generate sufficient return to justify it. The Pirates and Marlins weren’t being excessively greedy, their behavior reflected a sound business decision. For a team like the Rays, however, putting that money into the club does make sense. The returns to winning are increasing, likely higher than alternative investments. It’s getting to that point that is the difficult part. If you’re in the loss trap, spending many millions of dollars to improve the club doesn’t help much. And revenue sharing doesn’t help you out.

Revenue Function

Teams that have garnered success on small budgets in the recent past (e.g., Rays, Twins, Indians, A’s, and Marlins) haven’t used revenue sharing to get where they are. Instead, another baseball institution has served to give these teams a fighting chance: the reserve system that allow teams to pay players wages below their revenue-generating capability. The amateur draft gives every team in the league rights to valuable player-assets that teams can use to build winners. This mechanism is far more effective at promoting competitive balance and it lacks the disincentives of revenue sharing. Only teams who draft wisely and properly develop their players are rewarded.

Now, to Neyer’s second point. He argues that because competitive balance is no better than it was in the mid-1990s, when revenue-sharing for competitive balance purposes was first instituted, it doesn’t mean that measured imbalance wouldn’t have been worse without revenue sharing. This is certainly a possibility. The graph below shows the Noll-Sully measure of competitive imbalance from 1921-2009, smoothed with a lowess fit to map the trend.
Competitive Balance Over Time

The graph shows that competitive balance improved from the 1930s until leveling off in the late-1980s and early-1990s. Much of this improvement was likely a natural consequence of more high-quality talent becoming available to more clubs, the addition of the amateur draft in 1965 (the mechanism Branch Rickey felt was most important for leveling the financial playing field across teams), and other minor structural tweaks to the league. Why would the improving trend disappear just as revenue sharing came into existence? While I’m not certain that revenue sharing stopped the progress, I doubt it was instituted just in time to counteract a trend reversal.

In my view, if revenue sharing worked, there would be some evidence of it working over the past two decades that it’s been tried under various formats. How much longer are we supposed to give it, especially when what we observe is exactly what theory predicts we should observe? If we think it’s important to correct inherent differences in revenue potential across teams, I think revenue sharing is a poor tool for achieving that goal.

What Do MLB’s Leaked Documents Reveal about Revenue Sharing?

Here is my take in The New York Times.

Baseball’s revenue-sharing system was designed to increase the competitiveness of small-market teams that presumably lack the financial muscle to compete with wealthier franchises. Redistributing wealth would give poor teams more resources to improve their rosters, and richer clubs would have less money to extend their financial advantage. The cumulative effect would be to spread good players around the league to achieve a level of competitive balance where “every well-run club has a regularly recurring reasonable hope of reaching postseason play” — the standard put forth by the Commissioner’s Blue Ribbon Panel on Baseball Economics.

Despite the good intentions behind revenue sharing, doling out money to baseball’s have-nots has the unintended consequence of creating a disincentive to win. Though the correlation is not perfect, winning tends to attract fans, which increases local revenue. But a healthier bottom line means drawing less from the revenue-sharing pool. The quandary faced by poor-and-losing teams is that using the added wealth to improve their clubs increases local earnings, but these gains may be offset by reducing revenue-sharing payments.

A lengthier explanation is available in my upcoming book.

Roger Rehash

At one time I was writing a lot about the Roger Clemens sagam but I don’t have the energy or time to write about it as I once did. But, thanks to Internet search engines I’ve been getting several hits relating to Clemens. The problem with reading old posts is that it’s possible to interpret what I’ve said out of context. So, I thought I’d link to several old posts on the issue.

Does Clemens performance indicate steroid use? (more)

Do I think Clemens is innocent?

Thoughts on the Clemens-McNamee hearing

Disparities in Pettitte and McNamee testimony

SABR 40

I’ll be attending SABR 40 for the next few days. If you would like to talk, please approach me and introduce yourself. This is my first SABR convention.

I am giving two research presentations, one oral and one poster.

Resting the pitcher: How useful are pitch counts and days of rest? (with Sean Forman): Thursday, August 5, 2:30 – 2:55pm, Georgia 7,8,9

Many individuals believe that limiting pitch counts and increasing days of rest can improve performance and reduce injuries. Though the belief that overuse can hamper pitchers is widespread, there exists little evidence that adjusting pitch counts and rest has much effect on pitcher performance. In this study, Bradbury and Forman use newly available game-level pitch count data from 1988 to 2009 to evaluate the impact of pitch counts and rest days on future performance. They discuss their employment of linear and non-linear multiple regression analysis techniques to estimate the impact of pitch counts — in recent games and cumulatively over a season — and days of rest on pitcher performances while controlling for the effects of other factors.

Here are the presentation slides (pdf). Here is a draft of the paper (revised 10/18/2010).

Putting a dollar sign on the muscle: What are baseball players worth?: I’ll be by the poster on Thursday from 4-6pm.

In the 1970s, using team revenue and player performance data, Gerald Scully employed the standard marginal revenue product framework frequently used by labor economists to estimate the financial contributions of players. Bradbury’s study employs new information about baseball’s economic structure and sabermetric performance metrics in an updated Scully framework to estimate the dollar value of current major league baseball players. He compares player salaries and estimated worth by service class, presents a method for projecting player worth over the duration of long-term contracts, identifies some of baseball’s best and worst deals, and ranks teams according to their abilities to manage their budgets.

For more see my forthcoming book Hot Stove Economics.

Corey Hart Extension

Buster Olney is reporting that Corey Hart and the Milwaukee Brewers have agreed to a three-year $26.5 million extension. The contract buys out two years of Hart’s free agency—a fact that is easy to find thanks to Baseball-Reference’s new service time data.

Hart is having the best year of his career and has been a solid player for most of his career. I estimate Hart to be worth approximately $33 million over the term of his deal. Given his year of arbitration coming off a good year, he would probably have been looking at a $7–9 million contract in 2011. With this deal, Hart gets some insurance and the Brewers get a small discount for two free-agent years near his peak.