MLB Postseason Success

Executive summary

The issue of salary inequality in US Major League Baseball (MLB) has recently received attention from the media and the league itself. In 1998, MLB Commissioner Bud Selig formed a Blue Ribbon Panel with the purpose of describing and explaining the economic condition of MLB. Comprised of such dignitaries as Paul Volker, Senator George Mitchell, and columnist George Will, this panel recently made its report (Levin et al., 2000). The report points out that team payrolls have become increasingly disparate; the gap between “rich” and “poor” teams is not only wide, but it is growing.

Table of Content

Executive summary2

Introduction4

Results and Discussion8

Conclusion13

References16



Introduction

Efficiency wages models predict that higher wages lead to more productivity. This implies that the distribution of wages can affect worker performance, as is the case in a “tournament” (Lazear and Rosen, 2001). Tournaments reward players based on relative performance, and tournament payout schemes exist because they elicit more work than traditional payment schemes, especially when it is difficult to measure a worker's productivity. The tournament payment scheme describes the sports industry well, since sports salaries are based on how productive a player is relative to other players on a team or in a league.

Ehrenberg and Bognanno (2000a) examine professional golf in the US and Europe and find that players' performances are related to the size of the payoff. Specifically, larger prizes lead to lower (better) scores. Also, larger prizes appear to attract better players to professional golf events. McClure and Spector (2007), however, find no significant relationship between prize amount and performance in US college basketball. This result may indicate the differences between professional athletes and those who cannot reap the rewards of a tournament.

A tournament may lead to a large spread in salaries, since a larger payoff spread can induce more effort from the competitors. Thus, a tournament can lead to an unequal distribution of salaries, and a more unequal salary distribution may actually reduce performance if it leads to resentment among workers. Specifically, salary inequality may create morale problems that lead to less team cohesion and reduce team production. Sommers (2008) investigates the relationship between production in the sports industry and salary inequality. The author estimates the following OLS model using 1996-97 US National Hockey League (NHL) data:

where points measures team production, gini is the traditional Gini coefficient, and average salary is included to capture the impact of relative income between teams on performance. The author finds a to be negative and (marginally) significant, while ß is positive and significant. These results suggest that an NHL team's success will vary inversely with salary inequality; they also suggest that teams with higher salaries are more successful. The issue of salary inequality in US Major League Baseball (MLB) has recently received attention from the media and the league itself. In 1998, MLB Commissioner Bud Selig formed a Blue Ribbon Panel with the purpose of describing and explaining the economic condition of MLB. Comprised of such dignitaries as Paul Volker, Senator George Mitchell, ...