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PROFESSIONAL SPORT LEAGUES’ PAYROLL MECHANISMS AND THEIR EFFECT ON COMPETITIVE BALANCE _______________________ A Thesis Submitted to the Drexel University Graduate Board ______________________ in Partial Fulfillment of the Requirements for the Degree MASTER OF SCIENCE IN SPORT MANAGEMENT _____________________ by Aaron Haddad June 2010 ii ABSTRACT Professional Sport Leagues’ Payroll Mechanisms and Their Effect on Competitive Balance Aaron Haddad Master of Science in Sport Management Drexel University, 2010 The purpose of the study was to analyze the effects of team payroll mechanisms on competitive balance in the four major professional sports including Major League Baseball (MLB), the National Basketball Association (NBA), the National Football League (NFL), and the National Hockey League (NHL). In analyzing these effects, the purpose was (1) to understand the differences between the payroll mechanisms of each sport, (2) to determine the effects of each payroll mechanism on the competitive balance of the respective league, and (3) to describe which aspects of each payroll mechanism impact the measured competitive balance of the leagues. To analyze the measures of competitive balance, secondary data of team winning percentages was compiled. These values were broken down into categories based on the implementation of various team payroll mechanisms in each sport, including the addition of a soft salary cap and luxury tax in the NBA, hard salary caps in the NFL and NHL, iii and a luxury tax and enhanced revenue sharing plan in the MLB. Competitive balance was measured on both an intra- seasonal and inter-seasonal basis. Intra-seasonal competitive balance is the degree of equality of the teams in a league during a given season. This was measured by the average ratio of the actual standard deviation in a given season and the ideal standard deviation based on the Central Limit Theorem. Inter-seasonal competitive balance is the degree of uncertainty across seasons as to the playing strength of teams in a given league. This was measured by the average change from season to season in winning percentage of the teams in each league. Statistically significant changes in competitive balance were shown on an intra-seasonal level across multiple leagues based on the type of payroll mechanism implemented. The introduction of the soft salary cap in the NBA caused a significant drop in intra-seasonal competitive balance, where as hard salary caps in the NFL and NHL maintained the levels of competitive balance from before implementation. Luxury taxes in both the NBA and MLB showed improvements in intra-seasonal competitive balance as well. Inter-seasonal measures of competitive iv balance were not shown to be significantly affected by any payroll mechanism. While this study focused purely on the effect of payroll mechanisms, further research would prove helpful taking into account the effects of other factors such as team relocation, league expansion, and economic downturns in conjunction with these mechanisms. Also, as a number of these payroll mechanisms were introduced recently to their respective leagues, a larger set of post implementation data could provide more meaningful results. v ACKNOWLEDGEMENTS I would like to acknowledge and thank Dr. Amy Giddings, my advisor, for her support through this process. She always made me feel as if I was on the right track and encouraged me to keep pushing even when outside pressures made me want to take a break. I appreciate that she dedicated time to helping me during nights when she had already done so many other things and probably just wanted to go to bed. Thank you, Dr. Giddings. I would also like to thank my parents for listening to me constantly talk about this thesis even though they probably had no clue what I was saying. Thank you for letting me know how proud you are of me and keeping me motivated to finish. Lastly, I would like to thank my wife, Jamie, for her support of me every step of the way. While she had work of her own to do, finishing up a residency program and studying for her board exams, she talked through aspects of my paper and gave feedback that proved amazingly helpful. Her ability to help me clear my head and think of things in new ways helped get this thesis to the point it is today. I am proud of all the things in life we have done together and we can now add this to the list. Thank you. vi DEDICATION To my grandfathers, Walt and Tony, who taught me to have pride in my accomplishments and be thankful for what life brings. I know you both would have loved to read this thesis, and I’m sure you would have made me feel so proud to have completed such a task. Through losing you both too soon, I learned that if there is something you want to do in life, you should waste no time in getting started. I love you both very much and thank you for helping me become the man I am today. vii TABLE OF CONTENTS Page ABSTRACT.................................................ii ACKNOWLEDGEMENTS..........................................v DEDICATION...............................................vi LIST OF TABLES...........................................ix LIST OF FIGURES...........................................x CHAPTER 1. THE PROBLEM...........................................1 Introduction.........................................1 Need for the Study...................................2 Purpose of the Study.................................3 Research Questions...................................3 Limitations..........................................4 Delimitations........................................4 Definition of Terms..................................5 2. REVIEW OF LITERATURE..................................8 Fan Interest, Attendance, and Competitive Balance....9 Professional League Team Payroll Mechanisms.........14 MLB Payroll Mechanisms.........................14 NBA Payroll Mechanisms.........................20 NHL Payroll Mechanisms.........................32 NFL Payroll Mechanisms.........................40 Summary.............................................46 3. METHODOLOGY..........................................48 Research Design.....................................48 Current Research....................................49 Summary.............................................52 4. RESULTS AND DISCUSSION...............................53 Research Questions..................................53 Competitive Balance.................................54 National Football League.......................58 National Hockey League.........................63 National Basketball Association................68 Major League Baseball..........................74 viii Discussion of the Research Questions................86 General Discussion..................................92 5. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS FOR FUTURE RESEARCH.............................................97 Summary.............................................97 Conclusions.........................................98 Recommendations for Future Research................100 REFERENCES .............................................101 APPENDIXES..............................................106 A. STATISTICAL TESTS FOR INTRA-SEASONAL AND INTER-SEASONAL COMPETITIVE BALANCE FOR THE FOUR MAJOR PROFESSIONAL SPORTS LEAGUES STUDY...........................................106 B. STATISTICAL TESTS FOR NATIONAL FOOTBALL LEAGUE INTRA- SEASONAL AND INTER-SEASONAL COMPETITIVE BALANCE ........111 C. STATISTICAL TESTS FOR NATIONAL FOOTBALL LEAGUE INTRA- SEASONAL AND INTER-SEASONAL COMPETITIVE BALANCE.........113 D. STATISTICAL TESTS FOR NATIONAL FOOTBALL LEAGUE INTRA- SEASONAL AND INTER-SEASONAL COMPETITIVE BALANCE.........115 E. STATISTICAL TESTS FOR NATIONAL FOOTBALL LEAGUE INTRA- SEASONAL AND INTER-SEASONAL COMPETITIVE BALANCE ........118 ix LIST OF TABLES 2.1 NBA Salary Cap Exceptions............................31 4.1 Ratio of Actual to Ideal Standard Deviation of Winning Percentage...............................................55 4.2 Average Change in Winning Percentage.................57 4.3 NFL Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................59 4.4 NFL Average Change in Winning Percentage.............62 4.5 NHL Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................65 4.6 NHL Average Change in Winning Percentage.............67 4.7 NBA Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................69 4.8 NBA Average Change in Winning Percentage.............73 4.9 MLB Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................75 4.10 MLB Average Change in Winning Percentage............77 4.11 AL v. NL Ratio of Actual to Ideal Standard Deviation of Winning Percentage....................................80 4.12 AL v. NL Average Team Payroll.......................83 4.13 AL v. NL Standard Deviation of Payroll..............84 4.14 AL v. NL Payroll Discrepancy........................85 x LIST OF FIGURES 4.1 Ratio of Actual to Ideal Standard Deviation of Winning Percentage...............................................56 4.2 Average Change in Winning Percentage.................58 4.3 NFL Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................60 4.4 NFL Average Change in Winning Percentage.............63 4.5 NHL Ratio of Actual to Ideal Standard Deviation of Winning Percentage.......................................66
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