Is Revenue Sharing the Best Way to Keep Major League Baseball Competitive?
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REGION FOCUS WINTER_08_F1 6/9/08 2:46 PM Page 26 Is revenue sharing the best way to keep major league baseball competitive? BY ERNIE SICILIANO he Baltimore Orioles spent What this means for the game of league’s financial success. For example, T just over $95 million in payroll baseball — and how to remedy this the English Premier League — the top for the 2007 season. Their situation — is something that sports soccer league in England — generated American League Eastern Division economists see differently than the profits for the 2007-2008 season that rivals, the Boston Red Sox, spent over head honchos of major league baseball. were double the previous season. But $143 million. the 20-team EPL is dominated by just So, most observers were not sur- Is Equality a Good Thing four teams: Manchester United, prised when the Red Sox finished the for the Game of Baseball? Chelsea, Arsenal, and Blackburn season 27 games ahead of the Orioles. If the outcome of a season is Rovers. These “Big Four” are the only The Red Sox seemed to have simply essentially predicted by payroll, fans teams in the Premier League’s history bought better players. might quickly lose interest in watching to have won a league championship. The issue of inequality in baseball the games. That’s the worry of Major In the United States, parity advo- has attracted a wave of attention, League Baseball (MLB) executives. cates frequently cite the National much like the issue of income inequal- A July 2000 report issued by a panel Football League as one that has drawn ity in American politics. In baseball, headed by baseball commissioner Bud fans by offering a high degree of the concern is that higher-revenue Selig; former Federal Reserve Bank competitive balance. By most conven- teams will continue to monopolize all Chairman Paul Volcker; economist tional metrics, NFL teams are more the talent, resulting in a situation and current Yale University President competitive with each other and foot- where only the same few teams are Richard Levin; and columnist George ball is more popular than any other competitive year after year. Will, concluded that “the prosperity of American sport. The NFL typically Andrew Zimbalist, a sports econo- some clubs is having perverse effects generates more revenue than major mist at Smith College, has discovered that pose a threat to the game’s long- league baseball. The MLB’s commis- that, since 1995, a team’s payroll has term vitality.” sion report specifically cited the NFL indeed had a growing influence on a Many economists who study the as a successful model. team’s success on the field at a time game seem to agree that a sporting One way the NFL has accom- when revenue distribution has became league’s vitality is dependent on at plished competitive balance is by further skewed. As he notes, in 1989 least a minimal level of competitive maintaining a strict revenue-sharing the gap between the highest-revenue balance. But they differ in how much is policy that has managed to eliminate and lowest-revenue teams was $30 necessary to spur fan interest. the disparities created by differing million. By 1999 it had ballooned to “Uncertainty at some level is neces- market sizes. The league signs its tele- $163 million. sary for a sports league,” Zimbalist vision contracts as a league and Television contracts have some- said. “You want to have a situation distributes the revenue equally to all thing to do with the revenue disparity. where fans in as many markets have a teams. The MLB, on the other hand, For example, the New York Yankees chance to compete.” allows teams to set up their contracts own 37 percent of the YES Network, However, to expect all 30 major individually. This means that large which broadcasts their games. Last league baseball teams to have a market teams, like the Yankees, are year, revenues at YES were $340.5 real chance may not be realistic able to exploit their growing television million. “When the Yankees win, there or profitable for the league, market without sharing all the revenue are more people in the New York says economist Raymond Sauer of they generate. media market who can spend more Clemson University who blogs at money,” Zimbalist says. Indeed, over TheSportsEconomist.com. He calls Sharing the Wealth a quarter of all official baseball the barometer of competitive balance The 1997 collective bargaining agree- merchandise sold is Yankees gear. “overrated” in terms of explaining a ment was baseball’s first attempt at 26 Region Focus • Winter 2008 REGION FOCUS WINTER_08_F1 5/30/08 11:39 AM Page 27 revenue sharing. The agreement man- more likely to sign with the richest should become more equal over time. dated that all teams pool a certain quarter of baseball teams. His findings The luxury tax first entered the percentage (currently 31 percent) of suggest that progressive revenue baseball’s union agreements in 1996. local revenues, including television sharing does create an incentive The agreement has recently been money. The pool then gets divided for low-revenue teams to divest their amended so that the teams which among all teams, but the largest chunk talent. repeatedly spend more than a certain — about 48 percent — is given to the Maxcy’s findings bring to light a threshold are subject to progressively smallest-market teams. A team with a classic case of moral hazard. What higher tax rates. For example, in large television deal like the Yankees incentive do low-revenue teams have 2007, a team that passed the $148 would share their revenue with a less to spend money on talent when they million payroll threshold for the first profitable team like the Kansas City could lose every game and still collect time was taxed at only 22.5 percent, Royals. Ideally, the Royals would then a healthy check from the league’s high- while those who passed it a third time, be able to spend as much money on revenue teams? like the Red Sox and Yankees, paid payroll as the Yankees. “It’s almost like a scam,” says 40 percent. But economists are skeptical that California State University Bakersfield In fact, the Red Sox and Yankees revenue sharing produces such a economist Dave Berri. “If you go buy a seem content to continually spend scenario. “It doesn’t equalize spend- team in Kansas City and get money gobs of money and pay the luxury tax. ing,” Sauer says of revenue sharing. from revenue sharing … you can just For them, the tax is merely an impedi- “It depresses spending.” keep the money.” ment to spend more, not a ban. The When a team’s management signs a Anecdotally, there are instances more those two teams spend, the more player, they estimate his salary based of this disincentive mechanism at revenue baseball collects. on how much additional revenue the work. The most flagrant example For Sauer, that’s the ideal situation. team expects to gain from him. For occurred in 2006, when the Florida “That’s where you want to put your tax example, a player signed to a $5 million Marlins cut their payroll from $60 burden,” he says. contract is expected to bring in million to $15 million, despite receiv- This proposal doesn’t solve the $5 million worth of revenue in terms ing $30 million in revenue-sharing moral hazard problem of lower- of television ratings, higher atten- money. revenue teams sitting on their dance, and merchandise sales. revenue-sharing money, however. To But if that revenue is shared across A Better Solution: remedy that, Sauer says baseball all 30 teams, individual owners do not The “Luxury Tax” should rely on something else favored receive all $5 million of the generated One thing that Sauer and other econo- by economists: competition. revenue. Consequently, teams are less mists agree would work better is a With any form of revenue sharing, inclined to spend on talent. This might luxury tax on a team’s payroll. Such a he says, “you take away from teams create competitive balance, but only tax would be progressive in that it that are in demand and give it to if the high-payroll teams reduced affects only rich teams that spend teams that aren’t producing, [and] they spending. However, because revenue wildly. It only affects big market just sit on the money,” he says. He sharing affects the behavior of all 30 teams, Sauer says. “That’s going to prefers the idea of sending under- teams, every team reduces spending. cause [revenue] allocation away from performing teams down to the minor In other words, the rich teams spend big teams.” leagues at the end of every season, and less but so do the poor teams and the Many economists think this system calling up the best minor league teams gap in payroll remains the same. is preferable because it addresses to replace them the next season. Empirical studies specifically on the real problem that the MLB is “Every other country in the world baseball’s most recent revenue-sharing trying to address — hefty payrolls that does that,” Sauer said. For example, provisions have found little connec- sap competition — instead of focusing in the EPL of soccer, the bottom tion between increased revenue on the revenue generated by any four teams get “relegated” to a lesser sharing and enhanced competitiveness specific team. In addition, a luxury tax division if they finish the season with a in the league. In 2006, University of would not influence the spending poor record. Perhaps that’s just the Georgia economist Joel Maxcy found habits of the poorer teams the way sort of competition that baseball that the most talented players were revenue sharing does.