Archive for Economics

MLB and the Economy

There is an interesting story in today’s New York Times on baseball during the Great Depression. I don’t have much time to comment but I thought I would post a chart mapping MLB attendance and GDP from 1920–1960.

Attendance and GDP

Clearly, there was (and is) a relationship between the economy and MLB. Still, I’m an optimist about the current situation. Though top-tier sports are not recession-proof, I think there are a few reasons to think they are less sensitive to economic downturns than other sectors of the economy. Despite the down year, baseball’s attendance declined by about 1.1 percent. And when compared to 2006, attendance was up 3.4 percent. Even if fewer people go to the ballpark or buy deluxe cable packages, watching sports on television (and the internet) is cheap entertainment. Fans are loyal, and quite reluctant to give up sports even when times are tough. And the underemployed have more time to watch baseball.

Since 2003, MLB revenues have grown at an annual rate of over 12 percent—though we’re still waiting on 2008 numbers—and attendance has averaged 2.5 percent growth. My feeling is that the current recession will stunt growth rather than do serious damage. Yes, some people in MLB will loose their jobs, and maybe even player salaries will suffer a bit; though, I think they’ll be the last thing touched. The credit crunch may cause some teams to give jobs to players who they’d rather keep in the minors, when previously they would have preferred to pay a superior veteran a higher wage.

I think the article’s conclusion sums up the resiliency of baseball nicely.

Remarkably, while thousands of banks collapsed during the Depression and millions of people lost their jobs, no major league baseball franchises folded or moved during the period (though at least two changed hands, including the Boston Red Sox).

“The teams muddled through,” said Rodney Fort, a professor of sports management at the University of Michigan. “We know from this truly historic episode that things didn’t go to hell in a handbag.”

At least today, we’re not dumb enough to impose a 10-percent federal amusement tax like the one implemented in 1932.

All Choices Involve Tradeoffs

From economist Cy Morong.

The correlation between the change in strikeout rate and the change in contact rate was .142. So if a batter’s strikeout rate increased, his batting average while making contact also increased. Looking at the changes from 2005 to 2006 gave a .18 correlation.

Maybe this makes sense. If you swing harder, you strike out more. But a harder swing means the ball is hit harder, which should mean more hits. So combined with the earlier study, a player should be careful if he thinks he should make a big effort to strikeout less.

World Series Ticket Advice: Wait!

Justin Wolfers points to a study by Andrew Sweeting on changes in MLB ticket prices over time.

Sweeting has meticulously crunched the data on baseball ticket sales for 2007 on, and he cross-checked his analysis with data from another (anonymized) online source. He documents a rather striking fact: the prices of baseball tickets tend to fall through time. …

You might be concerned that this result simply reflects all the better tickets being sold early. But Sweeting’s dataset (of over three million ticket sales!) contains such amazing detail that the chart reflects comparisons among tickets within the same game, section, and row.

In fact, Sweeting’s biggest concern in my giving this advice is that his data cover only regular season games, while different patterns may apply to the post-season. But the economic forces behind Sweeting’s law probably apply even more strongly to the World Series. He argues that regular season-ticket prices are higher in advance of game day because people have to make plans in advance, which increases demand.

It seems likely that a greater share of the World Series crowd will be traveling to Philly for the game, and these folks will be especially keen to purchase game tickets before investing in airline tickets. As such, expect today’s ticket prices to be sky-high as these folks make their plans — and hopefully prices will start falling over the next few days.

More support for my theory (or is it a life philosophy?) of rational procrastination.

My experience with buying secondary-market tickets at sporting events is that the closer you get to the venue, the lower the price.

The Best Statement I Read Today

“When it comes to professional sports, we become socialists. With everybody else, we’re capitalists.”

That’s New York Assemblyman Richard Brodsky commenting on public subsidies to the new Yankee Stadium.

He continues.

“Critics on both the left and right have decried these taxpayer subsidies as socialism, wasteful, corrupt, anti-free enterprise, and unfair to the average citizen,” Brodsky’s report stated. “Yet the phrases `economic development,’ `job creation,’ `growth,’ etc. retain enormous political clout. A real analysis of these subsidies has yet to be done.”

How is it that these phony economic impact studies get so much play in the media? A quick search of “economic impact stadiums” via Google News finds mostly reporting of stadium proponent propaganda. In terms of Gwinnnett, I don’t think I’ve seen a single critical comment of the County’s economic impact projection since several officials touted it after approving $19 million from the reserve fund.

Thanks to Zach and Cyril for the pointer.

Addendum: Here is the dumbest statement I read today.

“I don’t really favor giving away taxpayer assets for nothing,” Commissioner Mike Beaudreau said.

Yet, he voted for the Gwinnett Braves stadium and its cost increase.

A Simple Way to Frame the Gwinnett Stadium Tax Burden

If you are a Gwinnett taxpayer, how much will the stadium cost your family? Here is the simple answer: $110 this year plus $3 per year for the next 30 years, for a grand total of $200 per household.

What percentage of the construction costs will be borne by taxpayers? 76%

Here is where these numbers come from.

Taxes Revenue: $31,000,000 ($12 million initial commitment + $19 million from reserve fund)
Amount Borrowed: $33,000,000
Total: $64,000,000

Annual Debt Service on $33,000,000: $2,438,240 (30-year mortgage at 6.25%)

Annual Stadium Revenue
Rent: $250,000
Ticket Fee: $479,000 (variable with $400,000 minimum)
Parking: $284,000 (50% share of net receipts)
Naming Rights: $100,000 (assumes $450,000 deal with $350,000 remitted to Braves/Liberty Media)
Total: $1,130,000

Annual County Subsidy: $1,325,240 ($2,438,240 — $1,130,000)

Estimated Gwinnett County Households in 2008: 279,820 (based on population and current 2.88 persons per household)
Population Growth: 3.8% (based on previous five years of growth)

Initial Tax Burden per Household: $31,000,000/279,820: $110
Annual Tax Burden to Cover Debt Service per Household: $3 (mean burden, based on population growth)
Sum of Tax Burden over 30 years per Household: $200 ($110 + $90)

% Public Contribution
Initial Contribution from Tax Revenue: 48% ($31,000,000/$64,000,000)
Contribution to Debt Service: 54% ($1,325,240/$2,438,240 = 54%; .54*$33,000,000 = $18,000,000 )
% Stadium paid by taxpayers: 76% ([($31,000,000+$18,000,000)/$64,000,000 = 76%)

What about the reported economic impact?

Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990; Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon, 1997; Coates and Humphreys, 1999).

These results stand in distinct contrast to the promotional studies that are typically done by consulting firms under the hire of teams or local chambers of commerce supporting facility development. Typically, such promotional studies project future impact and almost inevitably adopt unrealistic assumptions regarding local value added, new spending, and associated multipliers. They often use a regional input-output model that depends on outdated technical coefficients which are treated as invariant to shifts in supply and demand (Center for Economic and Management Research, 1991; Deloitte & Touche, 1994, 1996; KPMG, 1996; Economic Research Associates, 1996; KPMG, 1998; C.H. Johnson Consulting, 1999).

Siegfried and Zimbalist, “The Economics of Sports Facilities and Their Communities,” Journal of Economic Perspectives, 2000.

Until the touted study is made public, I think it is safe to assume that the expected impact will be zero, at best.

The Trade-and-Sign Gambit: A Failing Strategy

What is these players have in common: Gary Sheffield, J.D. Drew, Tim Hudson, and Mark Teixeira?

They were all acquired by the Braves via trade, with two or less years remaining until they became agents. Also, in each case the Braves gave up prospects who were currently or would eventually play in the major leagues. For two years of Sheffield, the Braves traded Brian Jordan, Odalis Perez, and Andrew Brown. For Drew (and Eli Marrero) , the Braves traded Jason Marquis, Ray King, and Adam Wainwright. For one year of Hudson, the Braves traded Juan Cruz, Dan Meyer, and Charles Thomas. For Teixeira (and Ron Mahay) the Braves traded Jarrod Saltalamacchia, Beau Jones, Elvis Andrus, Matt Harrison, and Neftali Feliz.

That list includes many high-level prospects, but the acquired players are all quite good. But there is another angle on these deals that I think is interesting. In all cases, the Braves attempted to use their exclusive negotiation window to sign the acquired player to a long-term extension. In three cases, the Braves were rebuffed and the player left as a free agent. Here is a summary of what happened to each player.

Gary Sheffield

Although they are trimming their payroll, the Braves have stated a desire to re-sign Sheffield. But their bid of about $10 million per season is well below what the Yankees reportedly are offering. (AJC, 11/30/2003)

Sheffield would eventually sign a three-year, $39 million deal with the Yankees; thus, the Braves were offering nearly 25% less than his eventual market value.

J.D. Drew

The Los Angeles Dodgers have agreed to a $55 million, five-year deal with with Drew, who hit .305 with 31 homers and 93 RBIs for the Braves last season. …The Braves wanted to re-sign Drew, but Boras didn’t even respond to the team’s initial contract offer of what was believed to be about $25 million for three seasons. (AJC, 12/24/2004)

Drew reached a five-year, $55 million deal with the Dodgers, from which he would opt out after three seasons. For the three years that he was in Los Angeles, he received $31 million. The Braves offer for this same time period was about 20% less than what he got. After opting out of his deal with the Dodgers, Drew received a substantial raise by signing a five-year, $70 million contract with the Boston Red Sox.

Mark Teixeira

“Teixeira said he had been “open” to hearing offers from the Braves all season, but got none. Wren said the Braves didn’t believe they could re-sign him after making an “aggressive” offer during spring training and having it rejected.

The GM said the offer would have made Teixeira one of the game’s highest- paid players. (AJC, 7/30/2008)

Now, we don’t know exactly what the Braves offered Teixeira, but “one of the game’s highest-paid players” is an empty PR statement that we all should ignore. A deal that averages what he turned down from the Rangers—$144 million over eight years, which translates to $18 million per year—would have made him sixth-highest paid players in baseball. The Braves had to be aware that a similar offer wouldn’t get the job done. This is also significantly less than the $20+ million/year deal that he is currently seeking. I estimated that he would be worth $24 million per year in a six year deal.

If the Braves offered him $19 million per year, that would fit with the Braves’ deficits in offers to Sheffield and Drew. That’s a lot of money, and it’s hard for anyone to sympathize with a player who receives a salary of that magnitude. However, someone will be reaping the financial returns of his good play. Is it so wrong that a player wants the revenue he is generating, especially after he played baseball for six years for a salary that was far below what he was generating in income to club that owns his rights? If you favor limiting player salaries because they are too high, then you need to ask yourself why you favor making owners, who are far wealthier than players, even richer.

Tim Hudson

The only player in the group whom the Braves have held onto is Tim Hudson. One factor that may have swayed Hudson, was his connection to the area. He grew up in nearby Columbus, Georgia, where he followed the Braves. J.D. Drew grew up in Valdosta, Georgia, but Valdosta is a solid four hours from Atlanta, and could easily secede to Florida and no one would notice. Tex went to Georgia Tech; but so did my sister, and she lives in San Francisco. As far as I know, Gary Sheffield doesn’t much like anything, and I suspect he doesn’t care much about geography. It seems that the hometown discount was the deciding factor…or was it?

The Braves signed Hudson to a four-year $47 million extension, which averages out to $11.75 million per year. Since that time he has been worth about $10.5 million per year in revenue, according to my estimates that are based on his play on the field. The estimates take into account both the growth in league revenue and playing time.

Why didn’t the Braves sign these players?

The reason that a team negotiates a contract before it is up is to take advantage of a player’s willingness to forgo risk. Most humans will sacrifice a higher probabilistic income for a guaranteed lower income. The Braves used this tendency to sign Brian McCann to a long-term contract that bought out years of potentially high-salary arbitration awards and free agency. Why didn’t this strategy work with three of the four players who turned the Braves down?

I believe the answer is because these players share two important characteristics: they were already quite wealthy, and they were close to becoming free agents. Gary Sheffield had accrued $93 million in salary from his baseball employers. J.D. Drew had received $17 million. Mark Teixeira will have banked $35 million before he hits the free agent market this offseason. By comparison, McCann’s $750,000 signing bonus and approximately $500,000 in major-league salary that McCann had received over the previous 1.5 seasons made him a pauper. What if he was seriously injured in a play at the plate in 2007? $1.25 million isn’t chump change, but it’s nothing compared to what he could expect to receive in the future and he’s not set for life.

The problem is that the Braves went after these players too late. These guys were already wealthy, and didn’t mind bearing a little risk in order to make a good bit more money during free agency, which was just around the corner. And for all three players it looks to have been the smart move—Teixeira’s fate is still uncertain, but he’s probably only improved his market value this season.

But what about Tim Hudson? Yes, he signed the contract; however, it seems that the Braves offered him his free-agent market value. No deal. If anything, the Braves overpaid Hudson despite the fact that Hudson has been a good pitcher (I like Hudson).

In conclusion, if the Braves have been actively trading for soon-to-be free agents in order to obtain an exclusive negotiating window, it hasn’t worked. The reasons why the strategy has failed are that players reached a point in their careers where they were willing to take on a little risk to shoot for a high return.

I grant that it is easy to criticize these deals in hindsight, and I admit that this problem wasn’t easy to spot at the time that these deals were being discussed. However, the experiences should serve as a lesson for all organizations why an exclusive negotiating window just before free agency isn’t all that valuable.

Hobbyists versus Experts

This post by Steven Levitt makes me smile.

On Tuesday afternoons we had wine tastings. I asked if I could be allowed the opportunity to conduct one of these wine tastings “blind” to see what we could learn from sampling wines without first knowing what we were drinking. Everyone thought this was a great idea. So with the help of the wine steward I selected two expensive bottles from the wine cellar and then I went down the street to the liquor store and bought the cheapest bottle of wine they had made from the same type of grape….

The results could not have been better for me. There was no significant difference in the rating across the four wines; the cheap wine did just as well as the expensive ones. Even more remarkable, for a given drinker, there was more variation in the rankings they gave to the two samples drawn from the same bottle than there was between any other two samples. Not only did they like the cheap wine as much as the expensive one, they were not even internally consistent in their assessments….

Fifteen years later, I am happy to report that the results of my little experiment have been confirmed by rigorous academic research involving more than 5,000 subjects, as published in this working paper of the American Association of Wine Economists. Their conclusion: fancy people with lots of training can tell cheap wine from expensive wine, but regular people cannot.

What lesson should we take from this? No matter what, do not let yourself become a wine expert who can tell the difference between cheap and expensive wines. When it comes to your pocketbook and wine, ignorance is bliss.

I would like to add one further lesson. It is easy to fool yourself into thinking that you know what you are doing.

The Economics of Trading Teixeira

Frank Stephenson at Division of Labour explains to Peter Gammons the economics of trading Mark Teixeira.

The Braves choice is to compare the net gain from keeping Teixeira to the value of the talent they can acquire for him. If trade rumors are to be believed, there are no teams offering substantial talent for Teixeira (this can, of course, change between now and the July 31 trade deadline). There would be two advantages to trading him for prospects rather than waiting for draft choices. One, as noted above, is that draft choices require signing bonuses. The other is acquiring prospects who have already played, say, 2-3 seasons of minor league baseball gives (for both the Braves and the trading team) a better read on whether they will turn out to be bona fide major league talent. That is, prospects with minor league experience are less risky than newly drafted players who have not yet begun the transition from high school or college to pro baseball.

I would like to address another popular incorrect statement that I keep hearing about the acquisition of Teixeira: that the loss of prospects was a waste unless the team re-signs him. Signing Tex has very little to do with giving up prospects to get him. As a result of his service time, the Braves acquired the right to play Teixeira for 1.5 years. After his indenture expires, he is free to sign with another team. Let’s say the Braves signed him on the free agent market after playing for the Rangers, what would the Braves give up? His salary and the team would lose some compensatory draft picks that would have gone to Texas. What will the Braves give up if they sign him after this season? His salary, and possibly some additional compensatory draft picks for signing with anther team. In both cases, the forgone prospects are irrelevant. The prospects the Braves lost were given up for the time he played with the Braves. Re-signing him has very little to do with them. The only small gain is that he might have been willing to sign for a little less than the free market premium to insure against risk of injury; but considering the fact that his agent is Scott Boras, there was little chance of that happening.

I’ve often heard the Tim Hudson deal discussed in these same terms. The Braves got Hudson for several years for only a few prospects. In fact, the Braves got Hudson for one-year for a few prospects. The Braves signing of Hudson to a long-term deal is a separate issue.

What Is Sports Economics?

That’s the question Dennis Coates (President of the North American Association of Sports Economists) asks over at The Sports Economist.

There was less agreement on what sports economics is. One possibility was that sports economics was the study of those “sports” that were commercial, though I think there was unanimous agreement that such a definition was far too narrow. Another possibility was that sports economics is defined by the application of price or decision theory. For example, a study that examines sport using incentives and objective functions or tries to understand, explain, or predict choices in a sport context is sports economics.

Here is my, which I posted in the comments. It is from my book review of John Fizel’s Handbook of Sports Economics in Managerial and Decision Economics.

It is the job of the economist to study interesting phenomena of human behavior, even if the application appears to be limited to the subject studied; thus, when such phenomena occur in sports, economists should study them. Sports games offer a wealth of data on human action in a controlled setting, and that ought to be a sufficient reason to study them.

Neglecting to study puzzles for their own sake can have two undesirable consequences. First, the researcher might fail to discover something that is relevant to non-sports economists, which was not initially obvious. As a general lesson of science, discoveries often happen serendipitously. It was not Rottenberg’s intention to discover a principle that is applicable to areas other than sports leagues. After engaging his curiosity within sports, other economists eventually realized the universality of his findings.

Second, if economists do not explore what is actually going on in sports games, future researchers will lack the knowledge necessary to use sports games to understand human behavior in general. Understanding the games is important, even if it only aides the researchers in identifying the proper control variables to include for studies that are relevant to non-sports economists. For example, to study racial discrimination in sports using performance and salary data—a common exercise in sports economics research—the social scientist must be able to properly value player contributions to insure the empirical models are properly specified. Statistics like the slugging percentage and earned run average in baseball are common measures of productivity, yet they are deeply flawed metrics. Without the proper evaluation, economists are left to trust the “conventional wisdom” of the public, which economists would not do for any other subject.

Ultimately, it is the job of all economists to observe economics everywhere; to study human beings “in the ordinary business of life” as Alfred Marshall put it. As Levitt and Dubner (2005) state in Freakonomics, “Since the science of economics is primarily a set of tools, as opposed to a subject matter, then no subject, how offbeat, need be beyond its reach.” Sports generate many intriguing economic questions that no economist should feel ashamed to answer, and it is probably the “freakonomic” appeal of sports economics that leads most economists to study it.

A Bad Idea for Solving the Maple Bat Problem

How not to address the maple bat issue.

The most prominent manufacturer of maple bats said Tuesday that baseball players and owners should ensure the quality of bats by paying roughly triple the price.

Sam Holman, founder of the Canadian company that makes the maple bats popularized by Barry Bonds, said baseball’s maple bat crisis — bats snapping into large pieces and flying toward players and into the stands — could be resolved by setting minimum prices that would compel manufacturers to use the finest wood rather than competing for business by selling cheaper bats made of lower-quality wood.

“It would level the competition,” Holman said. “That would do as much as any regulation of what kind of wood.”…

He can make a maple bat for $55 and sell it for $60 to $65, he said. He said he would support a $200 minimum so manufacturers would not be tempted to cut corners and use the lower-quality wood that he said is much more prone to breakage.

How would this cause bat companies to not cut corners? Players have already shown a willingness to use $65 bats. Maybe at a higher price, players would expect higher quality bats, but how would a player know whether or not he received a “$200” bat and not a substandard one?

I think Mr. Holman is a bit more interested in restricting competition in the maple bat industry than he is in ensuring bat quality. Let’s say MLB adopts a $200 minimum price for maple bats. Assuming the demand for maple bats is highly inelastic, fewer players will use maple bats, but they will continue to use maple bats at a high rate. As bat-making technology improves or input prices fall, bat-makers will reap wind-fall profits and cannot pass cost savings on to players.

And let’s say a new maple bat company comes along that can provide the same, if not superior, quality bat. The competitor would have a hard time wooing users when players already have confidence in an existing supplier. One strategy to acquire customers would be to sell bats at a cheaper price, possibly even giving them away initially. However, this would be against league rules; and thus, new bat companies will be less likely to enter the market. It also prevents companies who develop new methods for producing high-quality bats at a cheaper price from entering the market.

This proposal is rent seeking, pure and simple. Let’s hope no one on the committee is stupid enough to buy this argument. A preferable alternative for ensuring bat quality would be to set up objective testing standards that all bats must meet. A breakage test could be one of the tests employed. This would not distort the competitive incentives of the bat industry, and bat makers would continue to seek methods for cutting costs without sacrificing quality while attempting to earn greater profits.