Analysis of Underpayment in North American Sports Leagues

1. The Underpayment of Restricted Players in North American Sports Leagues Daniel Ciancioso Article Written by: Anthony Krautmann, Peter von allmen and davidberri

2. Goal • Provide a comparison of the underpayments across MLB NFL and NBA • Hypothesis: Restricted Players are Underpaid • Monopsony • One buyer, many sellers • Drives demand down • How have the players responded? • Unions • Veterans are favored

3. How Do You Measure a Player’s Worth? • Are players overpaid? • Economists: Salary in relation to revenue generated for the team • Ex/ Salary= $2.5 million and revenue generated = $1.2 million • Best players are underpaid the most Baseball • Marginal Revenue Product: The amount a player is worth • Marginal Product and team’s Marginal Revenue • Compare MRP to actual salary to find surplus • Free-market: substitute player’s free agent salary for MRP • Journeymen: Full MRP • Apprentice : 25% of MRP

4. Free-market • Compute MR of a win • Free agents wage reflects his MV to his team • Player bid reflects how many more wins he can bring to his team • Ex/ NFL RB • Result: Competitive bidding results in talent allocated to it’s best fit team Player Value • MLB: OPS (on-base percentage + slugging average) • NBA: Efficiency metric • NFL: Total yards and touchdown’s from passing, rushing and receiving • MRP: Measurement of contribution to team success • Free agents will earn their MRP

5. Surplus • To estimate the surplus (underpayment) of restricted players, compare restricted player’s imputed MRP to actual wage • Surplus >0: underpaid • League differences impact surplus size • MLB and minor league system • NFL and NFL Europa • NBA D-League • NBA teams don’t rely on financials as much • MLB negotiating power • Reserve players • Monopsony • Drafted NFL and MLB players negotiate contracts • NFL injuries • NBA salaries non negotiable

6. Underpayment in MLB • Sample of 308 potential free agent hitters from 1997-2002 • OPS= OBP + Slugging Average • Variables: position, market size Dummy : Starters vs. Utility Findings • Performance has a high economic influence on salary • Market size T-Stat = 1.98 • Apprentices: Median surplus $1.2 mil, 19% of MRP • Journeymen: Median surplus $221K, 86% of MRP • What does this mean? • Bargaining power • Best players

7. Underpayment in NFL • Sample of 308 free agents from 2004-2005 season • QB, RB, WR, TE: Total yards, Touchdown’s, fumbles and interceptions • QB: Passing and rushing touchdowns, passing and rushing yards • Non-QB: rush and receiving touchdowns, rushing and receiving yards • Performance is based from prior season • Starters vs. Utility players • Findings • Non QB Yards and QB Touchdowns highly significant and positive • Non QB Touchdowns and QB Yards insignificant • Apprentices: Median Surplus $492,000, 50% of MRP • Journeymen: Median Surplus $264,000, 75% of MRP • **Consistent with MLB, the higher the productivity, the higher the surplus

8. Underpayment in NBA • Sample of 378 free agents who signed multi-year contracts from the 2000-2006 seasons • Variables: Player performance (efficiency), market size, and position played • Dummy: Center, Power Forward, Small Forward and Point Guard • Findings • Market size nor bench players are correlated to free agent salaries • Premium for Centers and Power Forwards • Apprentices: $732,000, 66% of MRP

9. Cross-League Comparisons and Observations • Results consistent with Hypothesis • Restricted players are significantly underpaid • Surplus falls as players gain negotiation power • Largest surpluses from players who create the most value • The amount of surplus differs from each sport • MLB initially thought to have the largest surplus • NBA starters Major Conclusion • Owners exercise monopsosy power whenever and wherever they can! • Young, restricted superstars