Team Payroll Research Articles

Surprise information in Major League Baseball: how teams and betting markets respond

ABSTRACT Studies of financial markets have shown markets inefficiently underreacting to surprise information, discounting it too heavily in the short term. This paper explores this phenomenon in a new but analogous setting: Major League Baseball. I analyze how surprise information – the deviation between a team’s realized win total and the preseason expectations of betting markets – is incorporated into the teams’ personnel investments and into betting markets. Using fixed effect panel regressions, I find that higher win totals are associated with increased investment in the following season (as measured by team payroll and investment in free agents) and that, conditional on win totals, underperforming (overperforming) expectations in the prior season is associated with more (less) investment. This is consistent with teams discounting some of the surprise information. The effect is more pronounced for teams near the threshold of a playoff appearance. I find that some discounting is rational since roughly 27% of the gap between realized performance and expected performance does not persist into the following season. I find no evidence that betting markets are inefficient in their incorporation of surprise information. However, estimates suggest that teams significantly underreact to surprise information, an inefficiency analogous to those observed in financial markets.

Team payroll, pitcher and hitter payrolls and team performance: Evidence from the U.S. Major League Baseball

We use the U.S. Major League Baseball team level data in 1985-2015 and find an inverse U-shaped relationship between team payrolls and winning percentages. Furthermore, when investigating the winning effects of pitcher and hitter payrolls, we find the similar curvilinear relationship between pitcher/hitter salaries and team performance.

Testing Labor Market Efficiency Across Position Groups in the NFL

This article proposes a new metric to proxy for the incidence of player absences faced by National Football League teams based on the percentage of team payroll resources that are inactive over the course of a season. This variable significantly predicts team performance. Calculating this measure for individual position groups allows me to test for differences in the marginal impact of salary resources across these groups. Results indicate that resources dedicated to offense, in particular to offensive linemen and starting quarterbacks, have the highest marginal impact on team performance. This suggests a market inefficiency where these players were relatively underpaid.

Income Taxes and Team Performance: Do They Matter?

State- and local-income tax rates differ across locations, giving low-tax teams a competitive advantage when bidding for players. I investigate the effect of income tax rates on professional team performance between 1977 and 2014 using data from professional baseball, basketball, football, and hockey in the United States. Regressing income tax rates on winning percentage, I find little evidence of income tax effects prior to 1994, but since then a ten percent increase in income taxes is associated with a three percent decline in winning percentage. A robustness check using within state variation in income taxes affirms this result. The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states. The income tax effect is smallest in major league baseball, which could be explained by greater team payroll disparity. Placebo tests using college team performance find no evidence of an income tax effect.

Compensation and performance in Major League Baseball: Evidence from salary dispersion and team performance

This study examines the relation between compensation and performance in Major League Baseball (MLB), focusing on salary dispersion and team performance based on 1985–2013 MLB data. We examine whether the tournament theory or the team-cohesiveness hypothesis dominates the relationship. We also use the relative position of team payroll as one of the control variables and compare our findings with the results based on the absolute level of team payroll. This study applies a dynamic panel estimation approach. Our evidence overall supports the team-cohesiveness hypothesis over the tournament theory. We find that greater wage disparity is negatively related to team performance. Our findings also suggest that salary structure is not a robust incentive design for team performance in MLB. A different treatment of payroll variables alters the role of salary dispersion. When we take the payroll level as a control variable, salary dispersion shows a negatively significant effect on team performance, while it has an insignificant effect on team performance when the payroll's relative position is used as a control variable.

Performance or Profit: A Dilemma for Major League Baseball

Team owners and general managers in Major League Baseball (MLB) must balance high quality players and a chance to win with soaring player salaries and stable or smaller profit margins. We examine the effects of team payrolls on the revenues, profits, and winning percentage of MLB teams. Our study finds a strong positive association between high revenues and high player salaries for MLB teams. Further, MLB teams with higher player salaries tend to have higher winning percentages. However, the relationship between gross profit margin and player salaries is negative.

The NBA’s Maximum Player Salary and the Distribution of Player Rents

The NBA’s 1999 Collective Bargaining Agreement (CBA) included provisions capping individual player pay in addition to team payrolls. This study examines the effect the NBA’s maximum player salary on player rents by comparing player pay from the 1997–1998 and 2003–2004 seasons while controlling for player productivity and other factors related to player pay. The results indicate a large increase in the pay received by teams’ second highest and, to a lesser extent, third highest paid players. We interpret this result as evidence that the adoption of the maximum player salary shifted rents from stars to complementary players. We also show that the 1999 CBA’s rookie contract provisions reduced salaries of early career players.

Are We Getting Better or Are They Getting Worse? Draft Position, Strength of Schedule, and Competitive Balance in the National Football League

Monopsonistic labor market institutions, such as amateur drafts and free agency restrictions, are often justified by their competitive balance generating properties. In this paper we reexamine the balancing effect of the amateur draft for the National Football League. We extend an earlier treatment of this issue by Grier and Tollison (J Econ Behav Organ 33:136–149, 1994) by incorporating the unbalanced scheduling policy of the league, relative team payrolls, and team injury rates into our empirical model. We find that the college draft has a quantitatively strong and statistically significant effect on team performance even when incorporating several significant controls.

Work Incentives and Salary Distributions in Major League Soccer

Economists have argued that the size of superstar contracts in professional team sports may not only anger veterans on the team, but also adversely affect overall team performance (see, for examples, Wiseman, F., and Chatterjee, S. (2003). Team Payroll and Team Performance in Major League Baseball: 1985–2002. Economics Bulletin, 1(2), 1–10 and Sommers, P. (1998). Work incentives and Salary Distributions in the National Hockey League. Atlantic Economic Journal, 26(1), 119). Where team performance requires considerable cooperation among players, pay tends to be compressed relative to individual marginal products. In contrast, where team performance relies heavily on individual stars, pay among players may be more widely dispersed. (A standard reference on optimal pay structure is E. Lazear, Personnel Economics, 1995.) In professional soccer, cooperation and teamwork are essential. But, is pay relatively more dispersed among players on the more successful teams? This note examines the relationship between payroll and performance in Major League Soccer in 2011 and 2012. Beginning in 2007, Major League Soccer (MLS) adopted the “Designated Player Rule.” The rule initially allowed each MLS team to sign one player, with only $400,000 of the player’s salary (however large) counted against the team’s salary cap. The rule was dubbed the “Beckham Rule,” after Los Angeles Galaxy soccer star David Beckham, who was the first player signed under this rule. Beckham’s base salary in 2007 was $5.5 million (at a time when the team salary cap was $2.1 million). In 2010, each MLS team was allowed two designated players; teams could even sign a third designated player, if they paid a $250,000 luxury tax. The rule has thus enabled well-heeled MLS teams to sign lucrative deals with international stars, while dramatically changing how some team payrolls are distributed among team members. To determine whether or not greater income disparity among players resulting from the “Beckham Rule” has had any effect on overall team performance, Gini coefficients Atl Econ J (2014) 42:471–472 DOI 10.1007/s11293-014-9432-4

Quantifying Market Inefficiencies in the Baseball Players’ Market

Among the central arguments of the bestselling book and movie Moneyball was the allegation that the labor market for baseball players was inefficient in 2002. At that time, Billy Beane and the Oakland Athletics used observations made by statistical analysts to exploit this market inefficiency, and acquire productive players on the cheap. Econometric analysis published in 2006 and 2007 confirmed the presence of an inefficient market for baseball players, but left open the question of to what extent, and how quickly, a market correction would occur. We find that this market had in fact already corrected by 2006, and moreover argue that the perceived market response to Moneyball in 2004 is properly viewed as part of a more gradual longer-term trend. In addition, we use official payroll data from Major League Baseball to refute a previous observation that the relationship between team payroll and performance has tightened since the publication of Moneyball.

Labour market regulation and team performance: The Victorian Football League's Coulter Law, 1930–1970

The Coulter Law was a set of Victorian Football League (VFL) recruiting and payment rules that operated from 1930 to 1970 and set maximum wages for individual players. Testing of the conventional view – that most VFL clubs breached these rules to maximise the utility derived from winning games – is hampered by the unavailability of individual wage data. We develop a model that observes connections between player turnover and team performance at three VFL clubs. The ways that clubs managed team payrolls in a regulated labour market are not sufficient to explain variations in team performance. Clubs lost experienced players to minor leagues, regardless of whether they complied with the Coulter Law. The ability of clubs to develop replacement players had a stronger influence on team performance.

Salary distribution and team performance in Major League Baseball

This paper presents evidence that payroll inequality within a team is negatively related to on field performance, in terms of team winning percentages in Major League Baseball. This relationship is increasing over time during the sample period and robust to changes in the relationship between payroll and winning. We find strong evidence that, in levels, total team payroll and team specific Gini coefficients are nonstationary. The results also indicate that there exists a structural break in the relationship between payroll, inequality, and winning percent following the strike of 1994–1995.

Individual Team Incentives and Managing Competitive Balance in Sports Leagues: An Empirical Analysis of Major League Baseball

Major League Baseball and other professional sports leagues have long been concerned with competitive imbalances caused by differences in local revenues. The fear is that in the absence of salary caps or other regulatory mechanisms, smaller-market teams will be unable to remain competitive. This research uses a structural dynamic programming model to analyze ownership's payroll investment decisions. This model estimates the relationship between optimal payrolls and local-market populations and the influence of long-term customer equity dynamics on payroll investments. In addition, the author analyzes the impact of a recent policy intervention that implemented revenue transfers from high-local-revenue markets to low-local-revenue markets. The statistical results indicate that market population has a significant impact on the value of a team's payroll investments. For example, optimal payrolls double as the population increases from 2.5 million to 7.5 million. Furthermore, rather than improving competitive balance, the adoption of revenue sharing has decreased the incentives for small-market teams to remain competitive. The author uses the estimation results to evaluate alternative approaches to managing competitive balance. Specifically, the results suggest that basing revenue-sharing payments on local-market population and (higher) attendance rates reduces payroll dispersion.

Work Incentives and Salary Distributions in Major League Baseball

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):

REVENUE, POPULATION, AND COMPETITIVE BALANCE IN MAJOR LEAGUE BASEBALL

This article examines the impact of hometown market size on competitive balance in Major League Baseball. We use a four‐equation simultaneous model of win percent, team payroll, team total revenue, and team local revenue in order to avoid simultaneity bias in the estimates. Using two‐stage least squares, our results show that consolidated metropolitan statistical area population does have a statistically significant positive impact on local revenue. This leads to increased payroll, which has a significantly positive, but small, impact on win percent. Specifically, the estimated impact of an additional one million in population ranges from 0.233 to 1.126 additional wins per season. (JEL L38)

Race, Performance, Pay, and Retention Among National Basketball Association Head Coaches

This article estimates racial differences in the retention probability, pay, and performance of National Basketball Association (NBA) coaches over the period from 1996 to 2003. Using a hazard function approach, the author finds small and statistically insignificant racial differences in the exit hazard, conditional on team performance, team payroll, and a variety of coaching quality indicators. There were also statistically insignificant racial differences in the quit and discharge hazards, all else equal. Further, among marginal coaches, the author finds no racial performance differentials, all else equal. Finally, controlling for performance and qualifications, the author finds small and statistically insignificant racial differences in annual compensation, total contractwide compensation, and contract duration. Together, these findings do not suggest that Black NBA coaches are subject to racial discrimination in entry, pay, or retention.

Whatever Happened to Synergy? MLB as Media Product

The years 2003 and 2004 were years of divestiture. In a reversal of since mid-1990s, news focused on unlinking of media and sports ownership. In a short period of time, Major League Baseball owners approved Frank McCourt as new majority owner of Los Angeles Dodgers after he purchased team from News Corp. (i.e., Rupert Murdoch). In 2003 Walt Disney Company, one of News Corp.'s primary rivals in global media business, sold reigning world champion Anaheim Angels to Arturo Moreno. Time Warner put Atlanta Braves on seller's block and cut team's payroll to attract a buyer. (1) This new trend away from joint ownership of media and sports is not limited to baseball. Time Warner, for example, has sold Atlanta Hawks (NBA) and Thrashers (NHL). Disney, currently fighting a hostile takeover by Comcast cable television giant, is attempting to sell Mighty Ducks of Anaheim (NHL). Even in nation's largest and most lucrative media market, YankeeNets, brainchild of George Steinbrenner (and another source of millions of dollars of revenue for Yankees), has sold New Jersey Nets to a Brooklyn developer. (2) In this article we will offer an analysis of these recent moves. Why has there been a reversal of what seemed a logical trend: joint media/sports ownership? Does this signal a return to individual ownership mythologized by mainstream media and most baseball fans? Or do these deals reflect new kinds of relationships between corporate media and sports franchises? Whatever reasons for recent divestures, how will they affect operation of teams and their relationships with changing media landscape? THE LOGIC OF VERTICAL INTEGRATION Vertical integration (VI) is one of oldest operational goals in capitalist economics. VI essentially is control of all levels of supply chain from ownership to consumer. For media corporations this means control of (1) production, (2) distribution, and (3) exhibition (P-D-E). Despite conventional wisdom of current multinational corporations that VI is necessary for companies to compete, until quite recently vertical integration was regarded as something to be avoided because of its negative effects on consumer. (3) For decades U.S. government based many of its policies on assumption that a vertically integrated market structure is bad for public because of its anticompetitive nature. The control of each element of P-D-E chain leads to a market structure with high barriers to entry for new competitors. The negative implications of VI have been rationale for antitrust actions against many corporate schemes. In 1948 Paramount decision, motion picture studios had to divest their ownership of theaters. (4) In 1960s Justice Department refused to allow International Telephone and Telegraph (ITT) to acquire ABC. (5) Today such decisions look like ancient history as vertical integration is often seen as necessary for large corporations to compete in a global marketplace. The rhetoric of corporate consolidation has replaced the public interest as mantra for government regulators. Professional sports leagues and their member teams were exempt from many antitrust regulations, even before market mania of last twenty to twenty-five years. MLB has had an explicit exemption from most antitrust concerns since 1922. (6) The Sports Broadcasting Act of 1961 granted an antitrust exemption for all professional leagues in developing policies on television and radio. (7) These longstanding exemptions and new tolerance of vertical integration encouraged sports leagues, a legalized cartel, and media firms, a semilegalized cartel, to make a series of deals to enhance their relationships. One of key differences in media and sports combinations is toward backward vertical integration. …

Testing the Determinants of Income Distribution in Major League Baseball

Using data from U.S. Major League Baseball, this article compares parametric and nonparametric Gini coefficients for each team and year. We employ a panel‐data model to investigate the time‐series and cross‐sectional factors affecting the Gini coefficients and the parameters of the preselected distribution. We find that much of within‐team income distribution is determined by time‐related variables, with the 1994 MLB strike having an especially strong effect. A team's market potential does not seem to affect its salary distribution, but the average age of the players on a team's roster does. Furthermore, inequality first increases with team payroll, then decreases before increasing again.

Race, Performance, Pay and Retention Among National Basketball Association Head Coaches

This paper estimates racial differences in the retention probability, pay and performance of NBA coaches over the 1996-2003 period. Using a hazard function approach, I find small and statistically insignificant racial differences in the exit hazard, conditional on team performance, team payroll, and a variety of coaching quality indicators. There were also statistically insignificant racial differences in the quit and discharge hazards, all else equal. Further, among marginal coaches, I find no racial performance differentials, all else equal. Finally, controlling for performance and qualifications, I find small and statistically insignificant racial differences in annual compensation, total contractwide compensation, and contract duration. Together, these findings do not suggest that black NBA coaches are subject to racial discrimination in entry, pay or retention.

Baseball Competitiveness and the Free Agency Era

Major League Baseball owners have fired the first shot over the bow in their perpetual war with the players association concerning the financial health of the sport and the need for financial reforms that might slow down the growth of player salaries. The owners' salvo comes wrapped in a Blue Ribbon Commission Report that is clearly an owners' document, as the commissioner's office authorized the study and no labor representative was invited to be part of the commission. (1) For baseball fans fearing a repeat of the shutdown of the sport that occurred in 1994 and into the 1995 season, there is reason for both optimism and pessimism. The optimism rests with the fact that the owners have apparently recognized that the implementation of a salary cap is not a realistic possibility; the commission notably refrained from recommending such a cap as a solution to what it sees as the growing financial crisis affecting the sport, in recognition of the power and resilience of the players association in opposing such a c ap and in the belief that other remedies short of the cap can combat the financial inequities identified by the commission. The pessimistic side is that the commission, and many of the baseball owners, contend that there is a serious crisis of competitiveness in baseball that requires controversial reforms, including a luxury tax of 50 percent on all team payrolls exceeding $84 million. (2) The commission argues that such a tax--along with a series of other measures, including wider distribution of radio and TV revenue--is necessary to overcome the substantial disparities of revenue that make it increasingly difficult for all but a handful of teams to compete. The players association has stated publicly that it sees such a high luxury tax as representing a drag on players' salaries and therefore unacceptable as a concession in bargaining negotiations. (3) The rival positions of the owners and players have their roots in two separate but interrelated issues. First, each side reaches opposite conclusions regarding the financial health of the sport as measured by the financial stability and profitability of franchises. Second, the owners and players disagree about whether or not the sport faces a crisis of competitiveness that relegates all but the richest franchises to having no hope of competing for the playoffs. The commission uses financial data to bolster the owners' position that most franchises have been facing a serious financial crisis since the last work stoppage of 1994, even claiming that only three franchises have made money since that time. The players association, along with other critics of the Blue Ribbon. Report, counter that the commission exaggerates the financial losses by not including a variety of sources of revenue and tax deductions available to Major League teams, such as merchandising revenue, licensing agreements, and generous federal and state tax deductions, which allow a club to write off significant expenditures. (4) At this point, we simply don't have the data to confirm the reliability of the commission's claims of financial losses, but it's worth noting that business publications such as Financial Week and Forbes have used information available to reach conclusions very different from the Blue Ribbon Commission's. According to these publications, most Major League franchises have been making money, and the values of franchises have continued to rise across the board, as demonstrated by the escalating sale prices of Major League franchises. (5) FINANCIAL INEQUALITY AND COMPETITIVENESS The competitiveness issue is perhaps even more important to this debate because, if the owners are correct, only a narrow range of teams can hope to compete in today's financial environment, relegating most fans to having no hope that their teams can reach the postseason even before the season starts. Just how true are the commission's and owners' claims? …