RELATIONSHIP AND IMPACT

Relationship and Impact of Between Revenue, Payroll, and Winning on MLB Teams



Abstract

This paper introduces an alternative method of measuring competitive balance in major league baseball and employs it to assess both payroll (talent) disparity and performance (wins) disparity for 30 selected years between 1929 and 2002. Attention is devoted to the impact of two critical events in the evolution of the game: the influx of non-white players and the advent of free agency. The joint effect of these events was to increase payroll disparity while simultaneously reducing performance disparity. A single equation regression model found the effect of payroll disparity on wins disparity in the post free agency period to be positive and significant.

Table of Content

Introduction4

Literature Review4

An Alternative Method of Measuring Competitive Balance5

Data7

Results and Discussion8

Disparity in Payrolls and Victories9

Model and Expected Results10

Regression Results10

The Payroll Disparity Elasticity of Win Disparity11

Predicted Index of Dissimilarity for Wins for 200412

Conclusions12

References14

Relationship and Impact of Between Revenue, Payroll, and Winning on MLB Teams

Introduction

Recently there has been an escalating concern regarding payroll disparity across teams in Major League Baseball. This concern has been exacerbated in recent years by the continual on-field success of high payroll teams such as the New York Yankees and the Atlanta Braves. Both the National Football League and the National Basketball Association instituted salary caps (NFL in 1993; NBA in 1984) as a means toward eliminating payroll disparity (Horowitz, 1997). League officialdom (including labor leaders) apparently expected the resulting movement toward competitive balance to enhance league success (Fort, 2003). The renewal of those caps would seem to validate those expectations. In an attempt to acquire a comparable degree of league success, Major League Baseball has instituted a payroll tax for teams whose payroll exceeds some specified limit.

Literature Review

The last fifteen years have seen the economics profession generate a thorough body of research regarding the issue of competitive balance in MLB. These efforts have utilized a variety of competitive balance indicators including the range of winning percentages; the standard deviation of winning percentages; the relative entropy measure of information theory; the concentration of league championships; the Gini coefficient; the dispersion and season-to-season correlation of winning percentages; and the Herfindahl-Hirschman index (El Hodiri, 1971). Of these indicators, the most favored (for in-season competitive balance) has been the standard deviation of winning percentage compared to its idealized value.

An Alternative Method of Measuring Competitive Balance

Since the concerns raised by Utt and Fort regarding the use of the Gini to measure competitive balance revolve around the denominator, one possible solution is to eliminate the denominator. A measure of inequality known as the Index of Dissimilarity is linked to the concept of comparing the actual Lorenz curve with the lines of perfect equality, i.e., the numerator of the conventional Gini coefficient. A version this statistic has been used extensively in sociology and human geography as an indicator of residential and geographic segregation. The Index of Dissimilarity (ID) is given as

Where X denotes each team's proportion of total teams and Y denotes each team's ...