Archive for Economics

Why It’s OK for Players to Call Out Fans

Earlier this week, Evan Longoria and David Price stated that they were embarrassed by the weak attendance to their potential playoff-clinching game in Tampa Bay on Monday night. Their comments brought immediate backlash from the baseball media. How could guys making millions of dollars criticize fans for not supporting them, especially in the climate of a recession?! Pundits also cited the ugly facility, the difficulty of getting to the stadium, and the possibility that puppies might be run over by fans driving to the game. Oh, the horror.

What this was, was a rallying of the troops, and it’s exactly what the Rays need. Sporting events benefit from bandwagon effects. People want to go where other people are. If the Rays game is the place to be, then citizens need to know that. The way to make it so is to get someone who is well-liked to say it’s the place to be. I can’t think of better spokesmen than Longoria and Price.

Baseball is a business, and if fans don’t want to pay to see the games, that’s their right. But they have to understand that when you don’t patronize a business, it goes away. Do fans want that? If fans aren’t going to come out, then the owners may decide it’s in their best interest to trade their valuable commodities elsewhere instead of actively seeking improvements on the free-agent market. The owners may even decide it’s not worth staying in town, find a prospective new location where fans will go to the game, buy out the lease, and hit the road. Why stick around if fans won’t even come when the team is doing exactly what fans in many other cities wish their front offices would do?

Rays owner Stuart Sternberg has already announced that the Rays will be slashing payroll. The reason for this is that all the investments intended to improve the team were done, not out of kindness, but to make money. As I have found, in most cases winning begets high returns. But this hasn’t been true for the Rays.

If Tampa Bay residents want good baseball to remain, they are going to have to support it. Good fans sometimes need a push, just as good soldiers sometimes need a reminder from a general. That’s all Price and Longoria were offering, and I don’t think there is anything inappropriate about their comments.

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.

A Lesson in Concentrated Benefits and Dispersed Costs

File under: Mancur Olson was right.

From San Francisco Chronicle:

The vote came after the football team spent an astonishing $4 million-plus on a campaign in a city with only 46,000 registered voters. Signs backing the 49ers sprang up in front yards across the community as the team carpet-bombed the city with TV spots, radio ads and campaign mailers.

It was a different story for opponents of the stadium, who managed to collect about $20,000, enough for some yards signs and some campaign handouts for the volunteers who knocked on doors.

Spreading the Game Around the World

According to Sports Business Journal ($), the NBA is proposing lowering rookie salaries by 30 percent in the next collective bargaining agreement. In a bilateral bargaining arrangement (monopsony league and monopoly union), taking from not-yet union members might seem to be a favorable proposal. Even if current players might agree to such a policy change, I think the NBA might want to reevaluate this strategy. With the rise of professional basketball around the world, some of the best young players may choose to play in European leagues where their salaries are not restricted, just as Josh Childress (formerly of the Atlanta Hawks) did.

More American ballplayers jumping to Europe only makes further jumping easier. And sponsors eager to spread their brands worldwide may be willing to subsidize player moves outside the US. The NBA doesn’t have the market power it once did, largely thanks to its own successful promotion of the game internationally.

Cleveland’s Glory Days Are Over, But That’s To Be Expected

Looks like people are concerned about the declining attendance of Cleveland Indians games this year.

Just for fun, let’s rewind even further, to another weekday night game in April at Jacobs/Progressive Field. This one on April 23, 1996. The game-time temperature that night was 38 degrees, with a 20 mph wind, which computes to a wind chill factor of 17 degrees. According to the official box score, that game started in a drizzle.

Oh yeah, and there was one other factor that night. The Indians’ won-loss record: 12-6.

The attendance that night: 40,770.

Hmmmmm …

Now we have tonight’s game. A weekday night game in April. The Indians will go into the game with a record of 2-5.

In other words, plenty of good sections are still available.

All of which does not bode well for Cleveland’s American League Baseball Club. You know, the one that is so dependent on ticket sales in order to bolster the talent level.

As the Indians embark on their first homestand of the season, and moving forward through this season as a whole, what we have here is a perfect storm for attendance infamy. You have a bad team off to a bad start coming off a bad season, playing in frequently bad early season weather, in a bad economy.

The fears became reality Wednesday night when Progressive Field drew its smallest crowd in history of 10,071. The graph below shows the trend of Cleveland’s attendance and winning since 1996.


Attendance Graph

There is a strong association between winning, attendance, and revenue; however even when the Indians were winning a few years ago, they weren’t drawing crowds consistent with those in the 1990s. That attendance has not hit the levels it had in the 1990s does not surprise me. The late-90s Indians had the perfect storm of a good team and a new stadium—the latter quality is key. Economists have identified that new sports stadiums typically experience a “honeymoon effect,” which lasts between 6 to 10 years. During the honeymoon phase, fans go to the park for the park, not to see the team. That’s something that the Indians aren’t going to get back.

Looking at the recent past, when the Indians have been good fans have responded. In 2005, when the Indians won 93 games, attendance increased by 11% over the previous year. In 2007, when the team won 96 games, attendance increased by 14%. It’s also interesting to note that after these good season, attendance doesn’t drop off as much as the teamed gained from improving. But if you don’t stay good you can loose fans. In 2009—two years removed from the their AL Central title—attendance was down 19% when they won 68 games.

While low attendance isn’t a good thing, I don’t think the club should be disappointed because it’s attendance isn’t what it once was. The Indians shouldn’t expect numbers comparable to the 1990s, even in winning times, because those numbers were influenced by the honeymoon effect, which can’t be improved without a new stadium. But please, don’t even think about it.


What Do Economists Have to Say about Racial Discrimination in MLB?

Plenty. Economists have long used sports to analyze racial discrimination in labor markets because sports offer good measures of worker productivity that are difficult to find in most occupations.

I bring this up in response to a claim put forth by Orlando Hudson as reported by Jeff Passan.

“You see guys like Jermaine Dye without a job,” Minnesota Twins second baseman Orlando Hudson said Monday. “Guy with [27 home runs and 81 RBIs] and can’t get a job. Pretty much sums it up right there, no? You’ve got some guys who miss a year who can come back and get $5, $6 million, and a guy like Jermaine Dye can’t get a job. A guy like Gary Sheffield, a first-ballot Hall of Famer, can’t get a job. …

“We both know what it is. You’ll get it right. You’ll figure it out. I’m not gonna say it because then I’ll be in [trouble].”

What Hudson wants to say: He believes there is a racist element to the free-agent market in baseball, and that it’s paralyzing the 36-year-old Dye’s ability to earn what non-blacks with commensurate numbers received in the offseason.

In terms of the current market, I cannot say whether or not race is playing a role in player salaries; however, past studies of racial discrimination in baseball do not support the racism hypothesis. A survey article by Lawrence Kahn reveals that economists have found little evidence of salary discrimination in baseball. (Here is a more-recent article which contains similar information.)


(Click image to enlarge)
Literature Review

Analyses of racial bias are tricky, because omitted variable bias may hide existing racism or identify non-existent racism. Indeed, in a study I conducted using the baseball card market to examine consumer racial preferences I found that employing inferior performance metrics can lead to erroneous declarations of racism. Another problem with studies of racial discrimination is that data on the race of players is not widely available. Just determining the races of players is difficult.

I cannot say that the current market is free of racism; in fact, I would be surprised if it was racism-free. However, given the quantity of studies done that have found little to no effect, the burden of proof regarding racism rests on those who claim racism exists in baseball to provide evidence. Given the length of time since such studies have been conducted, I would welcome further study of the subject. If someone is willing to provide the racial classification to me, I’d be happy to estimate the impact of race on player salaries.

Why Does the MLBPA’s Labor Chief Work for Cheap?

The Sports Business Journal ($) is reporting that the current executive director of the Major League Baseball Players Association Michael Weiner is taking a salary of $1 million per year. He is continuing a practice started by Don Fehr, who drew a $1 million salary for his services as union head since the early 1990s. While $1 million is a nice gig if you can get it, it’s far below what the heads of other player unions have received. The late Gene Upshaw earned over $6 million per year to lead the NFL players union, and Billy Hunter received $3.4 last year heading the NBA players union.* What I find so amazing about this discrepancy is that Fehr was the most effective of the executives. In comparison to Upshaw, it’s not even close.

And it’s not that baseball players were unaware of Fehr’s worth, which was far in excess of his salary in terms of bargaining on the players’ behalf: Fehr refused pay increases. In real terms, Fehr took annual pay cuts. After accounting for inflation, $1.7 million would be required to keep the purchasing power of $1 million in 1990. Now, Weiner seems to be continuing the practice of working for a reduced wage. Why would Fehr and Wiener take so little?

I believe it has to do with sending a signal of solidarity during work-stoppages. In a bilateral monopoly market—monopsony buyer (league) and monopoly seller (players) of talent—bargaining strength is the way to best your rival. The threat of not playing or the threat of not opening the gates are the main weapons that the owners and players have against each other. And during such times, owners and players are on the edge of cracking. Team owners lose revenue and players forgo wages when regularly scheduled games aren’t played. Owners and players have expenses to cover, and when funds get tight, people start to look for compromise. Players are particularly prone to cave because they typically don’t have another source of income.

The benefits of a labor stoppage to either side are long term, and may not even be realized by the current participants. The union head is like a general who must rally his troops, possibly standing like a stone wall in the face of mortal peril. Fehr, who has a better grasp on labor negotiation strategy than players, cannot act without the support of players. If he can’t convince them that he knows what he’s doing, all could be lost. And owners can sniff out weakness, largely because scared players have a history of blabbing to owners. How can Fehr keep his troops loyal? Taking a below-market salary is a good way to convince players that the stakes are greater than their short-run losses. “Hey, I know you’ve got three mortgages to cover, but this is about the long term. I could earn ten-times my salary working on Wall Street, but I work here because I believe in this cause. Don’t you believe? We’ve got to do what is right.” If you’re earning as much or more than most players can expect to make, it’s hard to find a sympathetic ear among players about sticking to principles.

When Fehr announced his retirement, former union leader Marvin Miller said the following.

“When I was there, there was always a signficant cadre of players who had personal experience in how bad things were before the union — how horrible the conditions were,” Miller said. “That’s a powerful factor in players understanding what the union means. Almost from the beginning of Don’s tenure, he had a membership where not a single player had played one game of baseball without a union. That could be a challenge at times, and he faced it quite successfully.”

Miller was an old union guy and a smooth talker, and he led players who had seen what listening to Miller would bring them. Supposedly, Fehr didn’t have the rhetorical skills that Miller had, so he may have had to use other means to persuade players to stay the course. And the players held firm under his leadership during the 1994-1995 strike when owners desperately wanted a salary cap. Taking less has to be a powerful signal to men who intensely want more.

But then how does taking less now help the union leader in the long-run? I assume that union leaders are no less self-interested than other individuals. The payout comes at the end. In his final year, Fehr received $11.8 million in compensation, which included back expenses and retirement. It’s not clear to me if this figure includes an $11 million gift that the players voted to Fehr as a parting gift or if this was part of his planned retirement package (I believe the payouts are separate). But even this isn’t a huge payout. The real benefit is that Fehr has established himself as a master of his craft. He can hire himself out as a speaker or consultant, or go work anywhere he wants for a big wage. It’s the same reason top macroeconomists lobby to accept a $200,000 salary to chair the Federal Reserve. Rumor has it that Fehr is going to be the next head of the NHL players union, where he won’t need a low salary to establish credibility with the players. He led the best-run union in professional sports for 20 years, he doesn’t have anything to prove to anyone else.

My guess is that Fehr set up a good system to produce a powerful union, and Weiner knows that to be successful he’s going to have to establish his credibility among the players just as Fehr did. If he fails, he’ll be unemployed quickly, possibly earning less than his current salary. If he wants to build a legacy to gain that big payday, he has to establish trust with the players, and taking a low salary is a good place to start.

* Hunter’s salary included a significant one-time payout for unused vacation time, so it’s unclear how representative this is of his normal salary. But, if we assume his salary has remained stable, he’s been receiving over $2 million per year outside of the payout.

Practical Jokes in Academic Journals

Apparently, the late Gerald Scully included a prank in his famous article “Pay and Performance in Major League Baseball,” published in the esteemed American Economic Review.


Shitters

According to Phil Porter, this was intentional.

Channeling Robin Hanson on Growth Hormone Policy

As I’ve stated before, I think the illegality of growth hormone actually promotes its use in sports. Yes, outlawing such a product with testing may raise the price and thus reduce the quantity used; however, I don’t know that this is the best way to solve the problem of growth hormone use. And let me be clear about this, growth hormone is dangerous, and no one should ever try to use it to enhance performance even if it had ergogenic effects. If it was shown to be a performance-enhancer, I would support its ban.

What we have is a situation with asymmetric information. Medical researchers understand that growth hormone has no ergogenic benefits, players do not. Players who are seeking an edge need to acquire information as to what works, and they don’t get their information by searching PubMed. They may look to pushers, Google searches, or members of the media for information. These places are not ideal, and may be enough to provide some doubts about the drug’s efficacy as a performance enhancer; however, in my mind, the banning of a drug by anti-doping authorities sends a loud and incorrect signal that it works.

Last night, I was thinking about this and realized this argument fits with one that Robin Hanson made over a decade ago. Hanson came to George Mason just as I was finishing up my coursework, but I still remember his job-talk paper: Warning Labels as Cheap Talk: Why Regulators Ban Products. Here is the abstract.

The most frequently mentioned explanation for product bans is that regulators know more about product quality than consumers. A problem with this explanation, however, is that such regulators should prefer to just communicate the information implicit in their ban, perhaps via a “would have banned” label. We show, however, that since product labeling is cheap talk, any small market failure, such as a use-externality, will tempt regulators to lie about quality. If consumers suspect such lies, regulators can not communicate their ban information, and so will ban instead. We also show that when regulators expect market failures to lead to underconsumption of a product, and so would not ban it for informed consumers, regulators should want to commit to not banning this product for uninformed consumers.

The underlying focus of the paper looks at the opposite of what I’m discussing, but the underlying rationale for lifting a ban on a product is the same. Hanson is focusing on informed regulators choosing to ban unsafe products, because it is a signal to buyers about its safety. The ban allows experts to signal danger to the uninformed. In the case of growth hormone, the signal that consumers are receiving isn’t about safety. Users are well aware that growth hormone, anabolic steroids, and amphetamines are not safe, it’s just that athletes feel the safety sacrifice acceptable in light of the performance-enhancing gains. These substances are illegal under the law, the safety signal has been sent.

When it comes to anti-doping rules, banning a drug may signal that it is not safe, but it also sends the signal that it works. Players who are willing to make the health-for-income (or fame) tradeoff look to these lists for evidence of efficacy. Being undetectable is a huge plus. We need to stop the Larry Bigbie‘s of the world who just want to play baseball and will do anything to do it. Bigbie told George Mitchell that he didn’t even notice it working, but continued to use. Why? Because it was undetectable, and deep down he must have thought it helped. This undoubtedly is reinforced by the placebo effect, which has far more support as an ergogenic aid than growth hormone.

Therefore, I believe that legalizing growth hormone is needed to send the signal that it doesn’t work, largely to undo the widespread common belief that growth hormone does improve performance. Will some people try it because it’s legal? Absolutely, just like ballplayers who wear legal but benign magnetic necklaces. But think of the powerful effect it would have if MLB pulled growth hormone off its banned list. I can’t imagine a more powerful signal of a drug’s lack of potency as a performance enhancer. If we are going to be paternalists, let’s be effective paternalists. I know this is a radical solution, but I believe it is the best solution.