Competitive Balance in the National Hockey League After the Salary Cap
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COMPETITIVE BALANCE IN THE NATIONAL HOCKEY LEAGUE AFTER THE SALARY CAP A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Meryn Grant May/2008 COMPETITIVE BALANCE IN THE NHL AFTER THE SALARY CAP Meryn Grant May, 2008 Economics and Business Abstract Previous studies have proposed that a salary cap may be the only measure that could promote competitive balance and maintain the financial viability of professional sport leagues. As a result of the 2004-05 lockout and the New Collective Bargaining Agreement a salary cap was implemented in the National Hockey League (NHL).Theory behind the salary cap suggests that the budget restraint will cause the redistribution of top talent, and a depression of salaries. This thesis hypothesizes that changes in team success that occurred after the 2004-05 lockout were the result of the implementation of the salary cap and the redistribution of top talent. This thesis uses an adjusted measure of team standard deviation of win percentage to investigate if the implementation of the salary cap changed team success and competitive balance. The variation in top talent and the implementation of the salary cap were found to be the primary determinants of changes in team success over the period investigated. In order to substantiate these findings, another model was estimated using conference rank as a dependent variable. The presence of top talent and median salary were found to be the primary determinants of conference rank. These findings, in conjunction with previous research, suggest that the salary cap has changed the competitive balance in the NHL with its initial implementation, through a redistribution of top ranked talent. KEYWORDS: (National Hockey League, Salary Cap, Competitive Balance) ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature TABLE OF CONTENTS I INTRODUCTION 1 II LITERATURE REVIEW 8 2.1 General Theory of Sports Leagues................................................................ 10 2.2 Uncertainty of Outcome Hypothesis (UOH) and Competitive Balance........ 15 2.3 Coase Theorem.... .................... ...................................... ...................... ....... 21 2.4 Subsidization Measures............... .............. ............ ............. .... .................. ...... 28 2.5 Salary Caps..................................................................................................... 31 2.6 Pay and Performance...................................................................................... 35 2.7 Salary Determination............. ......... ...... ......... ...... .......... ............. ......... ........... 39 2.8 Summary........................................................................................................ 45 III THEORY 49 3.1 Measures of Competitive Balance........ ........ ........................ .......................... 49 3.1.1 Dispersion of Win Percentages................ ....................................... 50 3.1.2 Within Season Standard Deviation.......... .............. ......................... 51 3.1.3 Herfindahl-Hirschman Index......................................................... 53 3.1.4 Team Standard Deviation and the Competitive Balance Ratio...... 56 3.2 Determinants of Competitive Balance........................................................... 66 3.2.1 The Presence of Top Talent............................................................ 68 3.2.2 Coaching Ability............................................................................. 71 3.2.3 Team Chemistry and Composition.................................................. 72 3.2.4 Summary of the Theoretical ModeL.............................................. 74 3.3 Conclusion...................................................................................................... 75 IV METHODOLOGY 76 4.1 Data Set.......................................................................................................... 77 4.2 Dependent Variables.. ........................ ...... ............. .......... ..... .............. ............ 79 4.2.1 Team Standard Deviation.. ...... .................. .......... ........................... 80 4.2.2 Conference Rank................... ......... ..... ................... ....... ............ ...... 82 4.3 Empirical Models ............ ................. ........ ............. ....... ........ ....... .................. 85 4.4 Independent Variables...... ............................. ......... ............ .............. ............ 88 4.4.1 Presence of Top Talent Variables .................................................. 88 4.4.2 Coaching Variables........ ........................ ....... ..... ........ ........ ............. 95 4.4.3 Team Chemistry and Composition Variables.. .......... ..................... 98 4.4.4 Salary Cap Variable........ ...... .................... .......... .................. .......... 100 4.4.5 Division Variable. ...................... .................... ........ ...................... 103 4.5 Conclusion.. ................... ................... ........ ........ ......... ............ ....................... 106 V RESULTS AND CONCLUSIONS 107 5.1 Model One Results........................................................................................ 108 5.1.2 Model One Conclusions................................................................... 120 5.2 Model Two Results....................................................................................... 119 5.2.1 Model Two Conclusions................................................................. 127 5.3 Limits and Further Research......................................................................... 128 5.4 Conclusion..................................................................................................... 129 Appendix..... ................................................................................................................ 134 Sources Consulted........................................................................................................ 136 LIST OF TABLES 2.1 Chapter Outline and Important Conclusions................................... .... 9 3.1 Standard Deviation of Winning Percentages in the NHL........................ 60 3.2 NHL Attendance Totals......................................... ...................... 61 3.3 Team Standard Deviation of Win Percentage Comparison...................... 63 4.1 Eastern and Western Conference Teams in the NHL. ... ..... .. ..... .. .. ... 84 4.2 Independent Variable Definitions................................................... 87 4.3 Measures of Talent by Position...................................................... 89 4.4 Points Assigned for Top Forwards and Defense................................... 90 4.5 Points Assigned for Top Goalies..................................................... 91 4.6 Division Assignments.......................... ....................................... 103 5.1 Model One Regression Results .................................................. '" . 109 5.2 Model One Regression Statistics..................................................... 110 5.3 Elasticity of Top Talent Coefficients for Model One............................. 112 5.4 Model Two Regression Results...................................................... 121 5.5 Model Two Regression Statistics.................................................... 122 5.6 Elasticity of Top Talent Coefficients for Model Two............................. 123 LIST OF FIGURES 3.1 Equation for Within Season Standard Deviation of Win Percentages.. ........ 51 3.2 Equation for Ideal Within Season Standard Deviation of Win Percentages.... 52 3.3 Equation for Herfindahl-Hirschman Index........................................... 54 3.4 Equation for Deviations in the Herfindahl-Hirschman Index..................... 55 3.5 Equation for Humphreys' (2002) Team Standard Deviation..... .......... ..... 57 3.6 Equation for Average Variation in Teams' Win Percentages.... .................. 58 3.7 Equation for Average Variation in Win Percentage in Each Season............. 58 3.8 Equation for Humphreys' (2002) Competitive Balance Ratio.................... 58 3.9 Equation for Adjusted Team Standard Deviation................................... 65 3.10 Determinants of Competitive Balance.............. .................. ............... 67 4.1 Equation for Adjusted Team Standard Deviation.................................... 80 4.2 General Function For Model One..................................................... 85 4.3 Variable Specification for Model One .. " ..... , ...................... '" ... ..... ... 86 4.4 Variable Specifications for Model One with TOPTALENTSD. .. .. ....... 86 4.5 General Function for Model Two..................................................... 86 4.6 Variable Specifications for Model Two.............................................. 86 4.7 Sample Calculation of TOPOFF Variable.. .. ... .. ... .. ...... .. .. .. .. ... 90 4.8 Equation for TOPOFFSD........................................ ...................... 93 4.9 Equation for TOPDEFSD............................................... ............... 93 4.10 Equation for TOPGOALlESD.. ........... .... ............... ..... .... ............ ... 93 4.11 Equation for TOPT ALENTSD. .. ...... .. .. .. ......... .. .. ... .. .. ......... 94 4.12 Equation for TOPT