Sports Economics

Homework #3

1. (10 Points) Using data from professional baseball, the following estimates were

obtained for the marginal revenue of various production statistics:

Hit $28,852.60

Home Run $208,285.00 (in addition to the value of the hit)

Offensive Walk $36,165.40

Offensive Strike Out -$23,956.20

Using these numbers, estimate the marginal revenue product of the following

baseball players. You will need to get player production statistics, available at

baseballreference.com (or a similar baseball archive) and obtain the following

information for each player: hits (H), homeruns (HR), walks (BB), and strikeouts

(SO).

Year Player Team Salary Estimated

MRP

Owner

Rents

2013 Manny Machado Orioles $495,000

2013 Evan Longoria Rays $6,000,000

2013 Mike Trout Angles $510,000

2013 Troy Tulowitzki Rockies $10,000,000

2013 Paul Goldschmidt Diamondbacks $500,000

2013 Jay Bruce Reds $7,541,667

2013 Dustin Pedroia Red Sox $10,250,000

2012 Ryan Braun* Brewers $7,000,000

* Note that 2012 was used for Ryan Braun instead of 2013 since he was suspended for a

significant portion of the 2013 season.

a. For each player, calculate the estimated total value to team owners and the

rents each player generated for their team (i.e., $Rents = $Est. MRP -

$Salary). Enter your calculations in the table above.

b. Given your calculations, do you think baseball player salaries are too

high? Explain.

c. Thinking about MRP and your calculations above, why are NBA players

paid more than athletes in other sports?

d. What will the impact on player salaries be if a professional sports league

with free agent players decided to relocate one of its teams? Think in

terms of MRP and explain your answer fully.

2. (2.5 Points)

a. There are two groups of baseball players, white and non-white.

Describe the implications of the economic model of employer

discrimination for the labor market outcomes of the two groups if

employers discriminate against the non-white group.

b. Under what circumstances would an owner be able to practice employer

discrimination over a long period of time?

c. How can there be discrimination against African-American baseball

players when they make 20% more on average than white players?

3. (2.5 Points) Under a salary cap system, who benefits from a lid on rookie

compensation? Given this, when would you expect union leaders to agree to

rookie compensation lids in collective bargaining? Is your explanation consistent

with the idea that union leaders concentrate benefits on politically powerful union

members and disperse the cost over the rest of the rank and file? Explain.

4. (5 Points) Observers of pro sports leagues have lamented over competitive

imbalance in one league or another at different points in time. Without

exception, these observers point to payroll imbalance as the culprit. Test this

claim by doing the following:

a. The NBA salary cap was in place for the 1983-84 season. Using the NBA

winning percent data (available at

http://rodneyfort.com/PHSportsEcon/Common/OtherData/DataDirectory.h

tml), produce a spreadsheet with the following columns: team name,

winning percent for each team for the six years prior to the year the cap

was in place (up to and including 1982-83), winning percent for each team

for the six years after the cap was in place (from 1983-84on). Calculate

the standard deviation of winning percent for each of the 12 years in your

spreadsheet (typing =STDEV(___) where ___ is the year column of

winning percentages). Then calculate the average of your standard

deviation calculations before and after the cap was in place.

b. The NFL salary cap was in place for the 1994 season. Using the NFL

winning percent data (available at the same location as above), produce a

spreadsheet with the following columns: team name, winning percent for

each team for the six years prior to the year the cap was in place (up to and

including 1993), winning percent for each team for the six years after the

cap was in place (from 1994on). Calculate the standard deviation of

winning percent for each of the 12 years in your spreadsheet. Calculate

the average of your standard deviation calculations before and after the

cap was in place.

c. What conclusions can you draw regarding the impact of salary caps on

competitive balance based on your analysis in parts a and b?

d. Are there any other factors changing during this period which cause you

caution in your analysis of the impact of salary caps on competitive

balance?

5. (2.5 Points) Suppose that the NCAA followed the Blue Ribbon Panel 2000

suggestion and ended eligibility for college baseball players entering the

draft. Would teams in MLB be better off? Why? Would college players be better

off? Why? Would there be any impact on competitive balance? Explain

6. (2.5 Points) Suppose you took players who were up for a new contract and then

compared their efforts before and after their new contract. Further, suppose their

performance fell after their new contract. Would you be able to tell from this

outcome if these players were strategic in their effort? Explain.

Here are some suggested things to collect for your paper due at the end of the term (not

due with your homework, just a suggestion to make the actual “writing” of the paper at

the end easier):

• Determine the competitive balance of your team’s division (AL West, NFC

South, etc) by looking at the years between division championship for each team.

• Explore the composition of your team’s payroll by calculating your team’s yearly

mean salary, median salary, and the percentage of their payroll that goes to their

highest paid five players.

• See whether you can find any evidence that your chosen franchise has or is

currently discriminating in the labor market in any of the ways we discussed in

class. For example, has your franchise had any African-American coaches?

(Hint: you are probably going to have to argue your point here and back it up with

supporting evidence).

• Plot your chosen franchise’s winning percentage for the 5 years prior to free

agency and the five years after free agency (in their league). Did free agency

appear to help or hurt your team? Explain.

• Examine your team’s draft position and winning percentage over time…does the

reverse order draft appear to help improve their team quality?

• Estimate how much money your team “lost” during the last work stoppage in their

league by multiplying the price of tickets the year prior to the stoppage times the

attendance the year prior to the stoppage.

Subject | Business |

Due By (Pacific Time) | 06/16/2014 09:00 am |

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