1. The Underpayment of Restricted Players in North American Sports Leagues DANIEL CIANCIOSO ARTICLE WRITTEN BY: ANTHONY KRAUTMANN, PETER VON ALLMEN AND DAVID BERRI

2. Goal Provide a comparison of the underpayments across MLB NFL and NBA Hypothesis: Restricted Players are Underpaid Monopsony One buyer, many sellers Drives demand down How have the players responded? Unions Veterans are favored

3. How Do You Measure a Player’s Worth? Are players overpaid? Economists: Salary in relation to revenue generated for the team Ex/ Salary= $2.5 million and revenue generated = $1.2 million Best players are underpaid the most Baseball Marginal Revenue Product: The amount a player is worth Marginal Product and team’s Marginal Revenue Compare MRP to actual salary to find surplus Free-market: substitute player’s free agent salary for MRP Journeymen: Full MRP Apprentice : 25% of MRP

4. Free-market Compute MR of a win Free agents wage reflects his MV to his team Player bid reflects how many more wins he can bring to his team Ex/ NFL RB Result: Competitive bidding results in talent allocated to it’s best fit team Player Value MLB: OPS (on-base percentage + slugging average) NBA: Efficiency metric NFL: Total yards and touchdown’s from passing, rushing and receiving MRP: Measurement of contribution to team success Free agents will earn their MRP

5. Surplus To estimate the surplus (underpayment) of restricted players, compare restricted player’s imputed MRP to actual wage Surplus >0: underpaid League differences impact surplus size MLB and minor league system NFL and NFL Europa NBA D-League NBA teams don’t rely on financials as much MLB negotiating power Reserve players Monopsony Drafted NFL and MLB players negotiate contracts NFL injuries NBA salaries non negotiable

6. Underpayment in MLB Sample of 308 potential free agent hitters from 1997-2002 OPS= OBP + Slugging Average Variables: position, market size Dummy : Starters vs. Utility Findings Performance has a high economic influence on salary Market size T-Stat = 1.98 Apprentices: Median surplus $1.2 mil, 19% of MRP Journeymen: Median surplus $221K, 86% of MRP What does this mean? Bargaining power Best players

7. Underpayment in NFL Sample of 308 free agents from 2004-2005 season ◦QB, RB, WR, TE: Total yards, Touchdown’s, fumbles and interceptions ◦QB: Passing and rushing touchdowns, passing and rushing yards ◦Non-QB: rush and receiving touchdowns, rushing and receiving yards ◦Performance is based from prior season ◦Starters vs. Utility players Findings Non QB Yards and QB Touchdowns highly significant and positive Non QB Touchdowns and QB Yards insignificant Apprentices: Median Surplus $492,000, 50% of MRP Journeymen: Median Surplus $264,000, 75% of MRP **Consistent with MLB, the higher the productivity, the higher the surplus

8. Underpayment in NBA Sample of 378 free agents who signed multi-year contracts from the 2000-2006 seasons Variables: Player performance (efficiency), market size, and position played Dummy: Center, Power Forward, Small Forward and Point Guard Findings Market size nor bench players are correlated to free agent salaries Premium for Centers and Power Forwards Apprentices: $732,000, 66% of MRP

9. Cross-League Comparisons and Observations Results consistent with Hypothesis Restricted players are significantly underpaid Surplus falls as players gain negotiation power Largest surpluses from players who create the most value The amount of surplus differs from each sport MLB initially thought to have the largest surplus NBA starters Major Conclusion Owners exercise monopsosy power whenever and wherever they can! Young, restricted superstars