Team Payroll Versus Performance in Professional Sports: Is Increased Spending Associated with Greater Success? Grant Shorin Professor Peter S. Arcidiacono, Faculty Advisor Professor Kent P. Kimbrough, Seminar Advisor Duke University Durham, North Carolina 2017 Grant graduated with High Distinction in Economics and a minor in Statistical Science in May 2017. Following graduation, he will be working in San Francisco as an Analyst at Altman Vilandrie & Company, a strategy consulting group that focuses on the telecom, media, and technology sectors. He can be contacted at
[email protected]. Acknowledgements I would like to thank my thesis advisor, Peter Arcidiacono, for his valuable guidance. I would also like to acknowledge my honors seminar instructor, Kent Kimbrough, for his continued support and feedback. Lastly, I would like to recognize my honors seminar classmates for their helpful comments throughout the year. 2 Abstract Professional sports are a billion-dollar industry, with player salaries accounting for the largest expenditure. Comparing results between the four major North American leagues (MLB, NBA, NHL, and NFL) and examining data from 1995 through 2015, this paper seeks to answer the following question: do teams that have higher payrolls achieve greater success, as measured by their regular season, postseason, and financial performance? Multiple data visualizations highlight unique relationships across the three dimensions and between each sport, while subsequent empirical analysis supports these findings. After standardizing payroll values and using a fixed effects model to control for team-specific factors, this paper finds that higher payroll spending is associated with an increase in regular season winning percentage in all sports (but is less meaningful in the NFL), a substantial rise in the likelihood of winning the championship in the NBA and NHL, and a lower operating income in all sports.