Download The Economics of Baseball

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Document related concepts

Chicken (game) wikipedia, lookup

Transcript
Player salaries, MRPL, and
exploitation
(revised 13 Nov. 2008)
News flash:
MLB players are highly paid
• Average MLB salary = $3.2 M (April 2008)
– More than 2 times as high as in 1998
– More than 10 times as high as in 1983
– Less than NBA ($5.4 M in 2007)
– More than NHL (~$2 M in 2007) and NFL ($1.4 M in
2006)
• Median MLB salary = $1 M in 2006, 2007, and 2008
– Highest ever; previous peak was $975,000 in 2000
– 85 players made $10 M or more in 2008
• Up from 66 in 2007
marginal revenue product of labor
(MRPL)
• = the amount of revenue that an employee
generates for his employer
• standard economic answer to “How much is
that employee worth?”
• can be measured in yearly terms (salary), or in
hourly terms (hourly wage)
• marginal product of labor (MPL) = how much
OUTPUT an employee produces
MRP theory & player pay
• First, note that athletes are not the only very highlypaid people in U.S. society
• Also, free-agent contracts are examples of
VOLUNTARY EXCHANGE (market transactions
agreed upon by buyer and seller)
– Nobody forces the owners to pay such high salaries.
• Rodney Fort: “talent is hired to produce [wins] in
the long run.”
– perhaps more than just wins...
– Mark McGwire, 1998: extra MRPL of $15M?
A labor market under perfect competition:
Assumptions
• Many buyers, many sellers
– > nobody has market power
• No restrictions on pay or employment
• No cartels among employers or workers
• Diminishing returns
--> downward-sloping demand curve for labor
• Upward-sloping supply curve for labor
Notation (for diagram drawn on board):
•
•
•
•
•
L = # of workers ( = QL = quantity of labor)
w = wage ( = PL = price of labor)
SL = supply of labor
DL = demand for labor
MRPL = marginal revenue product of labor
– MRPL = the amount of revenue that an
additional worker generates for the firm
Economic exploitation
• MONOPSONY: a labor market with just one buyer
• ECONOMIC EXPLOITATION
• = difference between a worker’s marginal
revenue product and his wage
• = MRPL - w
• In a monopsonistic labor market:
• w < MRPL
• w < w* (competitive wage)
When the baseball players’
labor market was a monopsony
• Until 1976, when all players were under the
reserve clause.
• RESERVE CLAUSE: a provision in baseball’s
rules that allowed owners to renew a player’s
contract automatically for one year.
– Players either re-signed with their teams after each
season or retired (or were traded or released).
– No free agency; no competitive bidding for players.
– Held salaries down; average salary = $25,000 in 1969.
Independence Day
• July 1976: new Basic Agreement gives all
players free agency after 6 years of service.
– Salaries surged after 1976; up 42% in
1976-77
– Can use monopsony diagram to illustrate
• [See link on course website, “MLB’s Labor Economic History, 1945 Present,” for details on the Messersmith-McNally case that ended the
reserve clause and brought free agency to MLB.]
Baseball’s current system
Years of ML
Eligible for…
service
0–2
Rookie minimum (Team can pay more if
($400,000 in 2009) it wants.)
3–5
Salary arbitration
6 or more
Free agency
(A handful of “Super
Twos” also can go to
arbitration.)
Baseball’s salary explosion,
1976-present
• “Freedom and prosperity”
• Shift from monopsony to competitive bidding was
less sudden than it seems
– Over time, more and more teams played the FA market
– Collusion against FA’s held salaries down in mid-1980s
• Salary arbitration (1973-) allowed 3rd-to-6th-year
players to piggyback on FA salary scale
• MLB revenues surged -- attendance rose, TV
revenues soared, stadium revenues soared, ...
Comparison of performance
(MRPL) and salaries
• First, how to measure MRPL for baseball
players? The standard, simplified way is a
two-step process:
– (1) Using player statistics, estimate each
player’s contribution to team wins;
– (2) Estimate the contribution of more wins to
team revenues.
For hitters, the one statistic that has
the highest correlation with team
winning percentages is...
“OPS”
• =
On-base percentage (OBP)
+ Slugging percentage (SLG)
• OPS * (player’s plate appearances as % of team’s)
= what Zimbalist and Bradbury use to measure
hitters’ productivity, in computing MRPL’s
For pitchers
• Earned run average (ERA) is the standard
measure
– Bradbury prefers “Defense-Independent
Pitching Statistics” (DIPS), which is like ERA
minus the contributions of the team’s fielders
• Includes walks, strikeouts, and home runs allowed
– Then compare a pitcher’s DIPS with the league
average, and multiply by his innings pitched as
a % of his team’s total.
Next steps toward estimating MRPL
• Estimate the player’s contribution to
team winning percentage, based on
wins as a function of OPS or
ERA/DIPS
• Estimate contribution of additional
wins to team revenues
Comparison of performance (MRPL)
and salaries:
• Exploitation = MRPL – salary
• Zimbalist (1992):
– Younger players tend to be exploited (pay<MRPL)
– Veteran players (6+ years in majors) tend to be “overpaid” (pay>MRPL)
• MRPL calculations by Bill Felber (The Book on the
Book, 2005) echo Zimbalist’s conclusion.
• MRPL calculations by Bradbury (p. 195) find
pay<MRPL (i.e., “exploitation”) but a much smaller
gap for veterans.
– But Bradbury doesn’t “think this is exploitive” if you take development
costs into account.
MRPL - salary, by service category
Salary as percentage of MRPL
(2005,
Bradbury;
(1986-89,
hitters,
Zimbalist)
pitchers)
Years of
service
Category
0–2
reserved
16 – 25%
(highly exploited)
11%, 10%
3–5
arbitrationeligible
50 – 64%
(exploited)
23%, 22%
6 or
more
free-agenteligible
140%
(overpaid)
92%, 64%
How do we explain those systematically
“overpaid”* veterans?
•
(* overpaid by Zimbalist’s and Felber’s estimates, not Bradbury’s)
•
Nature of the (seniority) system
– Most free agents are past their prime (age 30+), which reduces their MRPL, but as
free agents they’re in a position to earn the most money
– Limited supply of free agent players
– Many free-agent contracts are long term (less risky for player)
• --> Reduced incentive to work hard?
•
Statistical MRPL measure (based on stats and wins) may be too narrow
– Doesn’t count leadership, experience, consistency, marquee value
– Also doesn’t count expected value of playoff or World Series success, or of extra
offseason ticket sales due to a free-agent signing.
•
Back to supply and demand
– Limited supply of free agents, high demand for players who can help a team
– Concept of value above replacement – A player’s value is not just relative to the rest
of the league, but also to his team’s next best option.
• Ex.: A team that has no MLB-caliber catcher in its organization may be rational
to “overpay” for a catcher.
Salary arbitration
• A mechanism for players with 3 to 5 years of service to avoid being
underpaid relative to their peers
• Established in 1973, implemented in 1974
• How it works:
– If a player and his team cannot agree on his salary for the next
season, then, separately:
• The player submits a salary figure
• The team submits a salary figure
• An arbitrator decides which figure is more reasonable and awards it.
– “Final offer” arbitration: The arbitrator must pick one figure or
the other, cannot split the difference.
– The player and team, however, can always settle on a
compromise figure before the arbitration hearing.
– The vast majority of arbitration-eligible players reach an
agreement with their team before filing for arbitration or going to
arbitration.
» Salary arbitration is an acrimonious, risky process that
players and teams generally seek to avoid.
Effects of salary arbitration system
• Higher salaries (for players with 3-5 years of MLB
service)
– “I was going to be rich or richer”
– Salary arbitration and free agency a potent combination
– Ironically, this is true even though owners have won the
majority of salary arbitration cases.
• More multi-year contracts for young players
– Multi-year contracts are a way to avoid arbitration and
yearly salary spiral.