Labor Economics of Sports I: Wage Determination
An Overview n Smoothly functioning markets Labor Supply and Labor Demand n Is Le. Bron James underpaid? n Human Capital n Monopsony and Free Agency n Salary Arbitration n Superstars and Winner-take-all n When to turn pro? n
What’s the difference between Tara Lipinski
And Funny Cide?
To see answer: Consider Labor Supply n Indifference curves x • Show desires • Personal trade-off • Goods vs. Leisure L
To see answer: Consider Labor Supply n Indifference curves x • Show desires • Personal trade-off • Goods vs. Leisure n Constraint in 2 parts n Exogenous Income (I) • Vertical Segment n Downward sloping • Slope=wage (-w) L
To see answer: Consider Labor Supply n Indifference curves x • Show desires • Personal trade-off • Goods vs. Leisure n Constraint in 2 parts n Exogenous Income (I) • Vertical Segment n Downward sloping • Slope=wage (-w) n Best off at tangency n Best possible mix Leisure Work L* T L
What happens if I rises n n n Pure income effect Moves straight up What causes this? Leisure Work
What happens if I rises n Pure income effect n n n Can afford more of everything Moves straight up What causes this? n Tara v. Funny Cide More Leisure Less Work
Responses to changes n What happens if w rises? n n Constraint gets steeper Two effects n Substitution effect: • Leisure costs more • Work more • Longer careers in baseball n Income effect: • Can afford more of everything – including leisure • Oscar de la Hoya quits boxing
The Other Blade of Scissors The Demand for Labor n n Firm weighs marginal costs & benefits Marginal benefit n n Marginal cost n n Wage or salary (w) Profits maximized when: w=MR*MPL What happens to MPL when add workers? What happens to Demand when: n n n Marginal Revenue Product=MR*MPL Workers become less productive? Output becomes more valuable? Why did NBA salaries skyrocket in 1990 s?
What is Le. Bron Worth? n Simplify problem n n n Fixed Supply” of Le. Bron w D SLJ What sets wage? Demand! L
What drives demand? n Attendance Gate revenue up $5. 3 M in Cleveland n Venue revenue n • Sponsorship revenue up 17% n Media revenue Local TV ratings up 265% n Regional TV ratings up 231% n n Le. Bron may be a bargain
Human Capital n n What is an investment? Can invest in people as well n n n General vs specific skills Worker pays for general skills n n Increase skills – why are you in college? Firm cannot recoup investment Firm helps pay for specific skills n Firm can recoup investment • So why doesn’t it pay all? n Examples? n A rationale for the reserve clause?
Monopsony n n n Upside down Monopoly Lower wages Lower employment Deadweight loss Application to sports? Can you buy a suit from Jim Thome? n ME S $ wc wm D Might have 30 years ago Lm Lc L
Monopsony and Baseball n Early years marked by “thievery” n n n William Hulbert – a unique thief n n n Nat’l Assn of Professional Base Ball Players Pittsburgh Pirates named for piracy of players Steals 5 players from other clubs Calls for end to thievery Forms National League of Baseball Clubs n n Key: Teams reserve 5 players Eventually extended to all players: Reserve Clause
Seemingly Innocent n Reserves for length of contract n PLUS one year Key: Players not allowed to play without a contract n Recursive system keeps players stuck n Other leagues copy – often verbatim n
Free Agency All major sports have eliminated Reserve Clause (later we’ll see how) n Limits on Free Agency differ n NHL has many classes of free agency n NFL allows teams to keep “franchise player” – at a price n Salary caps in NBA & NFL limit movement n
A-Rod and the Yankees Do rich teams get all the best players? n The Yankees and Alex Rodriguez n Didn’t pursue him n Pursued him n Why did they change their minds? n Think Marginal Product n
Ronald Coase and The Curse of the Bambino n n Economists believe free agency overrated Were things different pre-free agency? n n n In 1920 Red Sox sold Babe Ruth to Yankees Connie Mack twice sold off championship teams Key is the Coase Theorem n n n First applied by Ronald Coase to pollution Don’t need government to solve an externality Just need well-defined property rights
The Idea of the Coase Theorem n Consider: pizza factory and a brewery n n If Pizza factory has property rights n n n Brewer compensates pizzeria Or reduces pollution If Brewer has property rights n n n Brewery’s fumes affect pizza makers Pizzeria compensates Brewer Or cuts back pollution Result independent of rights n n Pollution – or its impact - reduced Only difference: who gets paid
The Coase Theorem and Free Agency does not affect talent n Babe Ruth worth more in NY n Yankees paid owner of Red Sox in 1920 n Now he would pay Babe Ruth n Players flow to most valued use n Only difference is who gets paid n Implications of Revenue Sharing? n
Rank Order Tournaments n Market bases reward on productivity n n As productivity rises – so does reward Some rewards are discontinuous Second by one stroke or ten? n Senior VP vs CEO n n Based on “rank order” in contest n Not on actual contribution
Why Use Rank Order? n Best to pay MRP Incentives appropriate n Equivalent to paying “piece rate” n n Usually don’t pay “piece rate” Pay by hour, month, year n Seems inefficient n n Key: How to judge productivity?
Tournaments Stimulate Effort Want workers to try hard n Cannot always see how hard they try n Easier to see who tries hardest n Set up distinct rewards n Winner makes much more than loser n Bigger spread gives greater incentive n
Problems with Tournaments n What if contest seems uneven? Joe Louis & the “Bum of the Month” n Participation and effort may fall n n Is trying hard the only way to win? Tonya Harding whack, whack n Shoot first, pass second n May compress wages to avoid sabotage n
The Economics of Superstars n Like tournament – skewed rewards n n S Who wants 2 nd best surgeon? n n n Disproportionate reward to being best P Fixed supply Rationed by price D’ TV skews rewards n n Greater access to best Decline of minor leagues D Q
Problems Caused by Superstar Effect n Little Girls in Pretty Boxes n Eating disorders rampant –especially gymnasts • 2/3 among college gymnasts – not even elite! n n Would violate labor laws – if paid Injuries go untreated • “Would lose muscle tone” in cast n Faust’s Gold n n n East German girls given “vitamins” Birth defects, medical and sexual side-effects What about the boys? n n Some want to be big: BALCO scandal Some want to be small: jockeys and tapeworms
Measuring Inequality n Does free agency affect salary distribution? n n To see line up by income (Excel) Fish-eye increases with inequality n n n Measure with Lorenz Curve Compares population with income What do absolute equality/inequality look like? Problem: Curve is hard to interpret Gini Coefficient: a more precise measure n n Ratio of fish-eye to triangle Has risen with Free Agency in all sports
Arbitration A way to deal with disputes n Mediation – play the middleman n Arbitration – play the judge n n n Binding vs non-binding Danger of arbitration Can be addictive n Must consider motives of arbitrator n
The Problem with Arbitration n n Arbitrator likes job Doesn’t want to offend either side Chooses middle Lose incentive to compromise Arbitration “addictive” Labor Firm Arbitrator
Final Offer Arbitration n Each side makes final offer n Arbitrator must choose one Restores incentive to compromise n Problem with practice in baseball n n Ignores ½ the market Can consider only credentials & peers n Worse than free agency n n Ripple effect of others’ errors
When to Turn Pro? n n When to cut down tree or sell wine? Key tradeoff for all three the same: n n n Waiting => lose current income Selling => miss out on higher value Consider Le. Bron James n n If went to college: Would improve skills But: Would delay earnings • For simplicity assume career length fixed n Risk may also play a role • Insurance as scouting report
A Simple Decision Rule n Simplifying assumptions n Earns S if turn pro right away • Ignore uncertainty or risk of injury n Skills & earnings rise at rate g in school • Would earn (1+g)S if wait one year n Earnings worth less in one year • Interest rate = r • Present value of waiting: n n Le. Bron stays in school if g>r Turns pro if g<r
Скачать презентацию Labor Economics of Sports I Wage Determination
5e9a274557d90001b7e73e905c9a2901.ppt