Baseball Prospectus Interview about Hot Stove Economics

David Laurila interviews me about Hot Stove Economics at Baseball Prospectus.

Here’s an excerpt.

DL: Do the luxury tax and revenue sharing work?

JCB: My thought is that there are some very real negative incentives created by it, which cause bad teams, particularly bad losing teams, to continue to lose. There is a disincentive to win, because winning would mean you’re not going to get the revenue sharing that you were once getting.

One of the things that I find in my estimating-revenue function, which includes revenues from revenue sharing, is that at very low levels for bad teams there is actually a revenue bump. I call it the loss trap. It shows that as you lose games, you can increase your revenue. That’s consistent with the economic incentives created by the welfare system—you realize that if you better yourself with work, you’re going to get less of the welfare transfer, so you have little incentive to work.

I don’t think that many teams are actually trying to exploit this revenue bump, but what it does demonstrate is that if you’re very bad, and the high returns to winning don’t kick in until teams are earning in the mid-80s of wins, in revenue, you have teams that are winning 70 games saying, “I don’t want to fall off into the abyss and become a really horrible team, but there’s really not a huge incentive to get better if I can sit here and get fat off of revenue sharing.” The documents that were released this summer seemed to indicate that is what some teams were doing.

Part II will be posted on Wednesday is now posted. Thanks to David for conducting the interview


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