The Underpayment of Restricted Players in North American Sports Leagues A Study Done By: Anthony C. Krautmann Peter von Allmen David J. Berri Presented By: Patrick Jennings

Overview Sought to unveil whether underpaying players who are restricted by the reserve clause is a common practice MLB, NFL, NBA Hypothesized that owners exercise monopsony power

Introduction Labor Unions Most CBA’s favor veterans IE – MLB

Literature Background Concern over an athlete’s salary relative to the value he generates Determined using MRP Scully (1974) By comparing the MRP to the player’s actual salary, he could determine whether the player was over/underpaid Players from the pre-free agency era were paid only 10-20% of their MRP In 1989, he found wages of free agents were only about 30% of MRP

Estimating the Surplus Scully approach is limited in relation to cross-league comparison Some leagues share broadcast revenue equally Fixed revenues are completely win-inelastic Identifying players’ MP Player productivity is highly interdependent Difficult to separate out the individual’s contribution to team wins

Underpayment in MLB Sample of players eligible for free agency seasons 308 potential free agents Only position players Primary performance statistic was OPS Variables they controlled for Player’s primary position Population of metropolitan area Dummy variable – starter or utility player

Underpayment in MLB Results VariableCoefficientT-Stat Constant9.488***19.91 OPS6.428***9.80 POP *1.72 CAT.287**2.09 First SS.731***4.45 Third LF CF.668***3.54 RF Utility-.524***-3.73 R2.48 # observations224 ***Significant level 1% **Significant level 5% *Significant level 10%

Underpayment in the NFL VariableCoefficientT-Stat Constant13.55***119.6 NONQBYD.001***6.03 NONQBTD QBYD QBTD.043**2.20 POP QB RB-.27*-1.90 WR Utility R2.46 # observations308 ***Significant level 1% **Significant level 5% *Significant level 10%

Underpayment in the NBA VariableCoefficientT-Stat Constant13.36***75.33 NBAEFF.139***15.39 POP1.13 x 10^-8**1.98 Center.624***6.34 PWForward.323***3.17 SMForward.210***2.00 PTGuard Utility R2.64 # observations378 ***Significant level 1% **Significant level 5% *Significant level 10%

Median Values of Surplus – Restricted Players SurplusWages as a % of change in MRP MLBApprentices$1,217,000 (165) 19% Journeymen$221,000 (78) 86% NFLApprentices$492,000 (198) 50% Journeymen$264,000 (86) 77% NBAApprentices$732,000 (272) 66% Starters – SurplusUtility – Surplus $1,676,000 (114)$311,000 (51) $304,000 (64)-$158,000 (14) $575,000 (71)$482,000 (127) $551,000 (59)$178,000 (27) $2,700,000 (83)$564,000 (189)

Cross League Comparisons/Conclusion Restricted players are significantly underpaid The surplus falls with the negotiating power of the player Largest surpluses are extracted from those who create the greatest value They entered this research expecting MLB apprentices to generate the largest surplus of all three sports – which it did Size of the surplus extracted from starting NBA apprentices was the largest All in all, owners do extract surplus wherever and whenever they can