Pay Dirt: The Business of Professional Team Sports.
Johnson, Bruce K.
Since Rottenberg's seminal paper |1~, interest in professional
team sports and the economics of sports has grown rapidly. Attendance at
major league baseball, football, basketball, and hockey games has
quadrupled, while the literature on the economics of sport has
multiplied enough to merit a subject classification in the Journal of
Economic Literature. One of the latest publications, Pay Dirt, is also
one of the most ambitious, covering a wide variety of issues common to
all four of the major team sports in North America. While baseball gets
more space than the others, Pay Dirt devotes considerable attention to
football, basketball, and hockey, too.
Perhaps Pay Dirt's most useful feature is the vast quantity of
data it contains. Its nine chapters include 88 statistical tables and 61
graphs giving league and team information on such topics as franchise
sale prices and dates, stadium and arena revenues, competitive balance,
and rival leagues. In addition, the 134-page data supplement at the end
contains ownership histories for every franchise in the five extant
leagues as well as for such defunct leagues as the American Basketball
Association, the All American Football Conference, and the Federal
League (baseball), among others. The data supplement also includes
annual attendance records and broadcasting revenues for every franchise
in the five extant leagues.
After a brief introduction in chapter 1, chapter 2 treats the market
for sports franchises, examining league expansions, team sales, and
relocations. Several detailed franchise histories are given.
The chapter asks why the sales prices of franchises have grown so
rapidly and suggests two competing explanations: a Bayesian adjustment
to an unexpected increase in cash flows from team operations, or a
bubble. While the evidence is insufficient to determine which
explanation is correct, both imply a fall in the future growth rate of
franchise prices.
Chapter 3 analyzes the effect of the tax code on the value of sports
franchises, in particular several-time baseball owner Bill Veeck's
innovation of depreciating player contracts after teams are bought. A
technical analysis of the effect of player depreciation on franchise
values under differing assumptions indicates that under the present tax
code and its interpretation, about ten percent of the typical
franchise's value is the capitalized value of player depreciation,
less than in the past. The chapter comprehensively recounts the court
cases and IRS rulings pertaining to the depreciation of contracts.
Chapter 4 examines the changing ownership status of stadiums, their
role in franchise movements, and the extent to which public stadiums are
used to subsidize professional teams. The chapter contains a wealth of
data on attendance and capacity, stadium rental contracts, construction
costs, and operating revenues and costs. Most stadiums fall short of the
economic payoffs claimed by their proponents and receive government
subsidies. The willingness to subsidize may come from the sense of
community generated by having a professional team in town.
Chapter 5 presents a comprehensive history of the reserve clause in
all the sports, including explanations of the major court cases
affecting the reserve clause's status in each sport.
To answer the question, "why do pro athletes make so much
money?" chapter 6 invokes the marginal revenue product of labor,
but makes no attempt to estimate the marginal revenue products of pro
athletes. After giving a brief overview of player salary trends in the
four sports, it presents the results of a fairly standard econometric analysis of the links between baseball player performance and salaries.
The estimation shows interesting evidence of collusion against free
agents in 1986. Curiously, the chapter virtually ignores final-offer
salary arbitration and its effects. A technical appendix provides the
details of the estimation techniques and results, including elasticities
of salary with respect to performance in 1968, 1977, and 1990.
Chapter 7 looks at the economics of competitive balance. None of the
four sports has ever had perfectly balanced competition. The chapter
compares the effect of free agency and the reserve clause on competitive
balance in both baseball and basketball, the two sports that have most
weakened the reserve clause, and finds no difference in the dispersion
of win percentages or the frequency with which teams win championships,
just as Rottenberg predicted. It also examines the effect of other
institutions, such as the amateur draft and revenue sharing on
competitive balance, and it shows what effect differing market size of
league cities will have on the economically optimal distribution of
playing talent across teams.
Chapters 8 and 9 examine the history and the economics of rival
leagues in each of the sports, with the earlier chapter devoted to
baseball, basketball, and hockey, and the latter to football. Many
existing franchises came directly from competing leagues which merged
with their established rivals, while others owe their existence to
preemptive expansion in response to threats from rivals. Pay Dirt, while
written for a wide audience, generally succeeds in the sometimes tough
task of remaining accessible to nonspecialists while doing justice to
the economic theory involved. Economists interested in the technical
details of some of the analysis can turn to the book's three
technical appendices, or to the many other sources cited.
The sheer volume of information included is impressive. Nevertheless,
gaps exist. Some of them, for instance baseball salary arbitration, NBA salaries, player unions, and demand for sports, are scheduled for a
second volume, to be written by Fort and Roger Noll. So perhaps it is
not yet fair to criticize Pay Dirt for errors of omission, but one hopes
such issues as discrimination, emerging cable technologies, and the role
of minor leagues, among others, will be covered.
Given the ample space devoted to statistics and other data, Pay Dirt
is clearly intended to be a reference work on the economics of
professional sports. Unfortunately, its usefulness as a reference work
suffers from the curious lack of a subject index. Nevertheless, whether
you are a serious researcher in sports economics or merely an economist
who likes to see economic theory applied to fun topics, Pay Dirt is a
winner.
Bruce K. Johnson Centre College
Reference
1. Rottenberg, Simon, "The Baseball Players' Labor
Market." Journal of Political Economy, June 1956, 242-58.
