Work Incentives and Salary Distributions in Major League Baseball

Abstract

Baseball fans complain about the extraordinary sums of money team owners spend to sign free agents. The size of these superstar contracts may not only anger veterans on the team, but adversely affect overall team performance (Wiseman, F., & Chatterjee, S. (2003). Team Payroll and Team Performance in Major League Baseball: 1985–2002. Economics Bulletin, 1(2), 1–10). This note reexamines the relationship between payroll and performance in Major League Baseball (MLB) from 2001 to 2005. Specifically, is there still empirical support for the Wiseman and Chatterjee claim that the more equally this payroll is distributed among team members, the better the on-field performance of the team. To determine whether or not the structure of compensation has any effect on performance, Gini coefficients were calculated for all 30 teams in MLB from 2001 to 2005. Player salary data are from http://rodneyfort.com/PHSportsEcon/Common/ OtherData/MLBPayroll/MLBPayrolls.html. The larger a team’s Gini coefficient, the more unequal is the salary distribution. A Gini coefficient of 1 would represent complete inequality (one player earns all of the team’s payroll) and a Gini coefficient of 0 would represent complete equality of the salary distribution. For each of the five years, the team’s win percentage was first regressed on the team’s Gini ratio. The regression results for 2005 were as follows (t-values in parentheses):