Chapter 8 The History of Player Pay

1. Chapter 8The History of Player Pay To Accompany Sports Economics, 2ED Rodney Fort (PrenticeHall, 2006)

2. Overview Graphically demonstrate the value to owners of reducing competition over talent. Theoretically and practically drafts have reduced competition over talent and survived. Theoretically and practically the reserve clause reduced competition over talent but has not survived. The data show that the actual value to owners of reducing competition over talent has been large, indeed. The invariance principle suggests that the distribution of talent (and, hence, competitive balance) doesn’t change under the draft or reserve clause.

3. Introduction “Players have been bought and sold as though they were sheep instead of American citizens. ‘Reservation’ for them became for them another name for property right in the player.” -John Montgomery Ward, 1890. “Total free agency would destroy the National Football League.” - NFL Commissioner Paul Tagliabue, 1990.

4. Restricting Competition- Graphical Analysis Restricting competition over talent reduces their next best alternative to,say, N, rather than the competitive equilibrium value, P. Owners save the difference on all units of talent purchased.

5. A Two-Step Plan From the owners’ perspective, it would be valuable to reduce competition at both the entry level and after players are in the league. The tools used presently and in the past… The draft for entering talent. The reserve clause for existing talent.

6. The Draft With Competition: All teams scout out entering talent driving the price of talent up to the value of that talent in its most valuable use to the league. Restricting Competition: Draft reduces competition by restricting players to sign only with their drafting team. *Much of the value of searching out talent, as well as part of the bonus and starting salary can be saved for some owners in the league.

7. The Reserve Clause In all MLB contracts by 1889, and backed by The Federal Baseball decision of 1922, in its heyday of the 1950s, the reserve clause read: If prior to March 1, … the player and the club have not agreed upon the terms of such contract, then on or before ten days after said March 1, the club shall have the right to renew this contract for the period of one year on the same terms, except that the amounts payable for the player shall be such as the club shall fix in said notice…

8. Implementation The interpretation is that the owner can roll the contract over in its last year and continue to do so year after year until the player agrees to a new contract or that contract is traded or sold to another owner. Then, it starts all over again. The reserve clause was inserted nearly intact into player contracts in all pro sports. *The clause reserved that player in perpetuity to the owner holding the contract, dramatically reducing next best alternatives.

9. The End of the Reserve Clause The end of the reserve clause ushered in what has been called “The Era of Free Agency.” Shortly after Curt Flood sued for free agency in the 1970s, and lost, owners granted arbitration rights to players to try to stave off any further free agency activism. Result: Arbitrator Peter Seitz’ 1975 arbitration decision about players Andy Messersmith and Dave McNally ended the reserve clause in MLB (except for players with less than six years’ experience).

10. The Value of the Reserve Clause to Owners Estimates of the value of free agency to owners were estimated after contracts were negotiated by free agents beginning in 1976. Annual salary increases ranged from nearly double to over triple for hitters and from over double to almost nine-fold for pitchers. In addition, salary growth over time revealed staggering increases for players in nearly every sport. *These amounts were kept by owners prior to the era of free agency.

11. Important Issue: Long-Term Contracts Prior to free agency, long-term contracts had no value to owners even though valuable to players. After the end of the reserve clause, long-term contracts became important to owners as well. Issues: Risk and Long-Term Contracts Strategic Behavior by Players

12. Risk and Long-Term Contracts Owners: Annual hiring risk leaves owners open to short-term fluctuations in player availability. Long-term contracts allow them to reduce negotiation costs and help insure a steady, predictable flow of player talent. Players: Variations due to uncertainty and injury leave players open to Risk of Performance problems. *Long-term contracts are valuable to both owners and players. Only individual assessments by each will determine whether a long-term contract is offered and for how long.

13. Strategic Behavior by Players Players can: Shirk by expending less effort than they fully are capable of expending. This is especially troublesome for owners if shirking comes in the form of strategic player effort. If owners can’t tell whether it’s shirking or just the “slings and arrows of outrageous fortune,” then… *Players may shirk, generally, and then perform to their full potential, strategically, only around contract renegotiation episodes.

14. Owner Protections and Shirking Owners have two mechanisms available to protect themselves. Monitoring Nothing is more closely monitored than player effort and outcomes. Full coaching staffs, the press, and fans contribute to monitoring. Incentive-Compatible Mechanisms Player economic welfare can be tied to the outcome enjoyed by owners. “Contingency payments” that reward players are common (unlike “performance” payments scorned by player associations).

15. What About Competitive Balance? So, restrictions on competition over players reduces player compensation. But owners have always argued that such restrictions also enhance competitive balance. But do they? Rottenberg’s Invariance Principle: The distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players’ MRPs.

16. The Draft and the Invariance Principle There is substantial evidence that the invariance principle holds, by and large, for player drafts. Players actually move to higher-valued league uses before they are drafted! In most leagues, draft picks can be traded before they are made. Players clearly do not stay put once they are drafted. Winning percents are invariant to the imposition of a draft in both the NFL and MLB.

17. History Repeats Itself Despite the evidence, MLB owners have recently been successful in expanding the player draft in the just completed labor negotiations. Owners unable to sign their first round picks now receive compensating draft picks in next year’s draft. The draft will be extended to include international players (Asia, Central America and the Caribbean).

18. The Reserve Clause and the Invariance Principle There is substantial evidence that the invariance principle also holds, by and large, for the reserve clause. While better players do move more frequently than prior to free agency, the marginal level of performance moves is small. Large revenue markets are no more dominant after free agency than before. Winning percents are invariant to the imposition of a draft in both the NFL and MLB. Championships are no more concentrated than prior to free agency.

19. Summary Graphically demonstrate the value to owners of reducing competition over talent. Theoretically and practically drafts have reduced competition over talent and survived. Theoretically and practically the reserve clause reduced competition over talent but has not survived. The data show that the actual value to owners of reducing competition over talent has been large, indeed. The invariance principle suggests that the distribution of talent (and, hence, competitive balance) doesn’t change under the draft or reserve clause.