Team Performance, Efficiency and Wage Distribution in Professional Baseball

Abstract

The effect of wage inequality on team production is an important question in labor economics. Data from sports are well suited to study this problem, with more than 10 published papers in the last decade. We analyze the effect of wage inequality both on team performance and efficiency, using data from Major League Baseball(MLB) and a stochastic frontier model with a translog production function. Most studies have examined the impact of inequality within a linear framework, and found that more equal pay structures enhance team production. This presupposes that there is no limit to benefficial effects of equality in pay, an idea which seems suspect. In this paper we allow for a possible non-linear relationship between wage inequality and team performance, and find that most MLB teams have wage structures which are sub-optimal. Furthermore using a semi-parametric estimation we find that high efficiency teams have a lower degree of wage inequality than low efficiency teams. This suggests that teams first compete by trying to adjust the structure of the wages to the optimum and then increasing the amount of total wages.