Archive for Economics

College Athletics Monopsony

Here is a better (relative to this) economic analysis of the NCAA’s prohibition on paying players from Richard Vedder and Matthew Denhart.

Top-level college sports is big business, but very little of this flows to the student-athletes. Ohio State, for example, receives about $110 million in revenue each year from ticket sales, television rights, concessions, parking, logo sales, etc. — over one-fifth of what it receives in tuition revenue from its more than 50,000 students. And its basketball players are paid about $29,500 each.

In a competitive market, companies cannot exploit workers in this way for long, as rival firms will hire them away at higher salaries. In basketball, however, the NCAA cartel prevents that, dictating limits on pay (essentially college costs) and even penalizing transfers to other schools. Strict rules also prevent college athletes from signing lucrative endorsement deals or accepting gifts beyond a certain amount. Soon after entering the NBA, Mr. Durant further augmented his earnings by signing a $72 million deal with Nike; he inked other endorsement contracts with Gatorade, EA Sports and Upper Deck.

If all of that money from ticket sales and television rights isn’t going to student-athletes, where does it end up? In 2006, salaries for coaches and administrators accounted for nearly 32% of total athletic-department expenses. Many head football coaches at top universities earn five times the salary of their university president. At a time when most schools are tightening their belts with salary freezes, staff layoffs and the like, the University of Tennessee just announced it was going to start paying two assistant football coaches $650,000 or more each (the head coach makes $2 million). Jim Calhoun, head coach of the University of Connecticut men’s basketball team, recently made headlines when he launched into a tirade at a blogger who questioned his $1.6 million annual compensation. Those high salaries are financed from the talents of unpaid student-athletes. (Talk about income inequality.) So not only are the young being exploited, but the exploitation is being committed by their adult mentors.

Don’t Pay College Athletes?

Andy Zimbalist says no to paying college athletes.

It is difficult in the extreme to imagine how a labor market for student-athletes would work. For instance, football teams in Division IA generally have 85 scholarship athletes plus some 30 walk-ons. Should all the players receive a wage? Only the starting 22 players, plus the punter and place-kicker? Of those receiving a wage, how much should they be paid? What about the players on the men’s basketball team? The women? Should the players sign contracts while seniors in high school? And what about the first violinist in the school orchestra or the leading thespians in school drama productions?…

It’s neither economically feasible nor ethically desirable to pay student-athletes.

The argument is not pay all players or pay none of them. Right now, a system where some athletes get in-kind transfers (scholarships), and others don’t is already in place as schools don’t give scholarships to every athlete. Has he not even heard of semi-pro sports? What do violinists or thespians have to do with this? Why not bring in the High-Q team while you’re at it? College artists are free to sell their work to wealthy alumni, and often do. If they generate revenue for the school, I’m all for paying them.

Erasing the dead-weight loss of monopoly is undesirable? Taking away captured surplus of a state-supported cartel is undesirable? I’m not seeing the obvious moral errors here.

Here’s how you do it. If your marginal revenue product is positive (MRP>0), you get paid; if not, you don’t. Some people get paid to produce fine art, others do it for free because they enjoy the activity. Athletics is no different, except for the fact that rules forbid exceptional college athletes from being paid more than a scholarship.

In terms of ethical behavior (on which Andy is no expert), I’m more concerned about the kids generating vast profits for their not-for-profit institutions to host big parties for wealthy alumni to gather for the school’s benefit than I am about the feelings of players who want to play for the sake of playing.

Another Interesting Statement

[W]e find that contending teams do pay more for scarce superstars…. The 40% premium paid by contending teams is especially interesting given that the conventional wisdom might imply otherwise…. Given that the expected extra revenue associated with making the playoffs may be worth about $11 million, paying such a player an extra $2.8 million should be considered a bargain.

Anthony C. Krautmann and James Ciecka. “The Postseason Value of an Elite Player to a Contending Team,” Journal of Sports Economics, 2009 10: 168-179.

The Most Interesting Statement I Read Today

The [Hierarchical Linear] Model shows that teams do not pay differently for individual player statistics. That is, the New York Yankees pay the same for OBP, SLG, and fielding percentages as do the Kansas City Royals, once we control for other variables.

Kenneth H. Brown and Lisa K. Jepsen. “The Impact of Team Revenues on MLB Salaries,” Journal of Sports Economics, Vol. 10, No. 2, 192-203 (2009)

An Econ Major to Root For

Burke Badenhop gives me a reason to cheer for him.

“I’ve got no problems giving out tax money,” he continues, “as long as it’s earmarked to the right places. That’s what the economy is – allocating proper capital to people who need it, people who are going to make it double, triple …”

What in the name of Alan Greenspan does this 26-year-old pitcher know about capital asset ratio, microfinancing and product differentiation? “Not much,” he said with a laugh.

But he knows plenty more than most baseball players. Badenhop graduated from Ohio’s Bowling Green State University in 2005 with an economics degree and a 3.94 GPA.

“He took four classes from me and got all A’s, and some were tough upper-level courses,” said BGSU economics professor Timothy Fuerst, whom Badenhop credits with sparking his interest in the subject during his freshman year. “One class was on the Great Depression, which is pretty appropriate now.”

Badenhop wrote a term paper on sports economics. “One issue was whether it makes sense to use state money for new stadiums, and I remember Burke was skeptical about using public money,” Fuerst said with a laugh. “You better not tell that to his employers!”

Thanks to Skip for the pointer.

The Economic Impact of Sports Facilities

On Thursday February 26 at 7-8pm Kennesaw State University will be hosting the 10th Annual Grady Palmer Distinguished Lecture. The lecture is open to the public, and I believe that many people in the Atlanta area may be interested in hearing this year’s speaker.

Dr. Brad R. Humphreys of the University of Alberta will be presenting “What Do Economists Know About the Economic Impact of Sports Facilities?” Brad is one of the discipline’s leading authorities on the topic, and my opinions on the Gwinnett Braves stadium issue have been heavily influenced by his research. I encourage anyone interested in the topic to attend. Also, if you want to learn more about the Sport Management program at KSU, this would be a good opportunity to meet some of our faculty and majors.

You can find more information here. If you have any questions about the event, please feel free to contact me.

Speaker: Dr. Brad R. Humphreys
Topic: “What Do Economists Know About the Economic Impact of Sports Facilities?”
Location: Kennesaw State University, Convocation Center, Room 2016
Time: 7-8pm (with reception to follow)
Anticipated Economic Impact to the Community: $0

File Under Markets Will Find a Way

The draft-pick compensation required to sign Juan Cruz is hindering his signing with another team. Any team that signs Cruz, who is a Type-A free agent, would have to forfeit a top draft pick to the Diamondbacks. It appears that price is too steep for any interested team, which means that Cruz won’t get paid and the Diamondbacks won’t get any picks. I see some gains from trade here. The solution: sign Cruz to a below-market contract, then trade him to another team.

General manager Josh Byrnes said on Monday that it is possible that the right-handed reliever could agree to financial terms on a deal with another team. The D-backs would then sign him to a contract at that price and deal him to the other team in exchange for a player or players.

I can’t say too much,” Byrnes said. “But of late, they’ve talked to the union, we have talked to the Commissioner’s Office to see if there is a way where they could sign through us and then we would receive in trade what we would deem as enough value.”

Cruz, who made a little more than $1.9 million last year, is a Type A free agent. That means that the team that signs him would have to give the D-backs its No. 1 Draft pick — unless that pick falls in the top 16, in which case that team would give up its second-round pick. In addition, the D-backs would get a pick in the compensation round between the first and second rounds.

There is a feeling that teams have been reluctant to sign Cruz because they do not want to give up their Draft pick. The scenario that Byrnes laid out would be a way around that.

It’s moves like these that make me like Josh Byrnes.

The Elias rankings that determine free agent class are embarrassing. Though it’s not the entire problem, it’s not helping here. I’m a Cruz fan, but to classify him as a Type-A free agent is ridiculous. In the next CBA, I expect this will be addressed, possibly through eliminating draft-pick compensation altogether.

A Lesson in Bilateral Monopoly Bargaining

In the 2007 draft, the Braves selected UGA closer Josh Fields in the second round. He didn’t like the offer he got—niether did his agent, Scott Boras—so he went back to UGA for his senior year.

Negotiations between his agent, Scott Boras, and the Braves — as they are wont to do when the infamous Boras is involved — got hairy. A few weeks into the process, the Braves called Fields directly and gave him an ultimatum: sign now or talks would go dead until August. He didn’t sign. Talks went dead. And the more he hung around Athens, the more he prayed about it, the more he considered the logistics of the deal, the more staying seemed like a better option. “It just became a no-brainer,” Fields said. “It felt right to come back.”

One report indicates that the offer he rejected was likely between $400,000 and $450,000.

Fields had a good senior season, and was selected in the first round by the Seattle Mariners. Though the negotiations have been long, yesterday Fields agreed to a deal between $1.5 and $2 million.

Not every man could turn down nealy half-a-million; but Fields did, and it was the right decision. Scott Boras does know what he’s doing.

Is Bud Selig Worth $18 Million?

According to Sports Business Journal, that is about what Bud Selig received in compensation in 2007. It’s difficult to know his marginal contribution to revenue growth, given that the books are not open and I’m not exactly sure about what he does. However, what I am sure of is that Bud Selig has presided over an exceptionally prosperous era of baseball. While he may not deserve all the credit, he ought to get some.

From 2002–2007, MLB’s revenue increased 12.44% per year on average. During this same span baseball attendance was up 3.23% per year; and though attendance was down 1% in 2008, it was still up 3.4 % over 2006.

In addition, Selig seems to do a good job of handling the unique personalities of many proud owners. He’s kept labor peace, and he’s handled significant pressure from the federal government on several fronts. A lot of people don’t like Bud Selig, possibly for being rich or ending one All-Star game in a tie, but it’s hard to argue that he’s bad at his job. And considering that he is 74, no one would blame him for retiring, and I think the owners feel his compensation is what they need to retain his services.

There are a lot of rich people in the world. If you don’t like it, fine; but, it’s not Bud Selig’s fault. He possesses valuable skills, just like players on the field, and he’s going to be compensated for those skills or go somewhere else.

Be Careful When You Criticize Experts

Yesterday, baseball and political analyst Nate Silver accused Harvard economist Greg Mankiw of academic intellectual dishonesty. It’s not a charge that ought to be thrown around lightly.

The type of tax cut that Romer and Romer think falls into this category is what they call an “exogenous” tax cut — one designed not to counter business cycles, but rather a “spontaneous” tax cut under relatively healthy economic circumstances.

This is very much not the type of tax cut that we are contemplating right now. Instead, what is being contemplated is a countercyclical action in an unhealthy economy designed to return the economy to normal growth. Romer and Romer are not all that keen on this type of tax cut; in fact, they argue that such “countercyclical fiscal policy is not achieving its intended purpose,” and that “policymakers’ efforts to adjust taxes to offset anticipated changes in private
economic activity have been largely unsuccessful”…

The thing is that’s really irksome is that Mankiw should know a lot better. This is not some random blogger at Townhall trying to parse a difficult economics paper and overlooking an important point of context — this is one of the premier economists in the world. He knows very well what the Romer and Romer paper says — and he’s made a deliberate choice to misrepresent it.

In poker terms, this is what we’d call a “tell”. Mankiw doesn’t have anything. He’s bluffing. Out of ideas. Taking one for the team, and touting the party line for shits and giggles. Except, this isn’t exactly fun and games, and Mankiw should leave the discussions to people who are serious about getting our economy moving again.

Nate is a smart guy—smart enough that he ought to know when he’s in over his head—but he misses the boat on this one, as Mankiw is “kind enough” to point out.

I usually don’t respond to blogosphere commentary on my work because, after all, time is scarce. But this critique by Nate Silver is noteworthy because the error it makes is so fundamental. It offers a teachable moment….

This argument raises the question: Why did the Romers focus on exogenous policy changes? The reason is that these are the only changes that can be used to reliability identify the effects of tax policy. If a tax change is made in response to some event, call it X, that influences the economy, it is hard to disentangle the effects of the tax change from the the direct effects of X. The Romers focus on exogenous tax changes for the same reason doctors conduct randomized drugs trials–not because they are interested in randomization as a prescriptive tool, but because randomization solves a statistical identification problem.

Imagine if a clinical doctor reasoned the same way as Silver did. He would say, “All the evidence on the effects of this drug are from randomized drug tests. In my practice, I never randomize treatment of my patients. Therefore, I can safely ignore the results from the randomized experiments.”

That is, of course, fallacious. We need the randomized experiments to inform us about the effects of medical interventions, even though interventions in practice are rarely randomized. Similarly, we need to consider the effects of exogenous tax changes, even though many actual tax changes are not at all exogenous.

The point isn’t that Mankiw “should know a lot better”; he does know better. That’s why he’s a professor at Harvard and one of the most respected economists in the world. It’s always possible that an expert is wrong—they make mistakes all the time—but, when preparing a critique of an expert you’re first thought should be “what am I missing?” not “what an idiot!” If you think an expert should know better, he/she probably does. Start from this premise that you are wrong, and reexamine the disagreement. If you still think the expert is wrong, proceed with caution in presenting your criticism. E-mail a friend with knowledge in the area, or even send an e-mail to the expert. Jumping ahead to calling someone a partisan hack is a less forgiving approach, especially if the mistake is on your end.

The “error” that Mankiw supposedly makes is so fundamentally correct that it does make for a teachable moment (in more than one respect)—the kind that will stay in Mankiw’s class lecture notes for years.


Addendum:
For all the people out there criticizing Mankiw for dissing the Romers, I just learned something interesting from Mankiw’s recent NPR interview.

— Mankiw was a friend of Christina’s in graduate school.
— Mankiw was best man at the wedding of David and Christina.
— David Romer was best man at Mankiw’s wedding.

If he’s doing anything that the Romers find offensive or inappropriate, I think he’s going to hear about it and it would cost him some close friends.