On top of salaries, many players earn substantial endorsement income.
How can athletes be worth so much?
Marginal revenue product: MRP(W)=MP(W)*MR(W)
MP(W) is marginal product, or the player's contribution to winning percent. IN sports, where market power leads to downward sloping demand functions, MR decreases with output. MRP is the input's contribution to the revenues earned by the team owner.
Experience-earnings relationship: MRP on all jobs starts low, increases rather quickly, tops off, and then may decline as skill diminishes or health declines with wage.
If a player and team owner cannot reach an agreement in the their year, then the decision may go to an independent arbitrator, who must choose either the amount the player is asking or the amount offered by the owner. (Arbitration) The effect is dramatic INCREASE in salary.
Along with competitive imbalance, there will also be payroll imbalance as long as MRs are not equal.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team.
MRP theory dictates that players can only earn more if (1) they become more productive (i.e., MP increases) or (2) fans increase their willingness to pay for the result. If it is the case that MR increases, it means that players are more valuable than they used to be in the eyes of the fans. This means that owners will raise prices because fans are willing to pay more. Then, player pay will rise as long as there is competition for the players' services between teams. If salaries caused ticket prices to change, then they should almost always be moving in the same direction. But the empirical fact doesn't show that.
Some other competing explanations for how sports stars get paid:
(1)winner's curse
the over-bidding for the players
(2)bidding wars
essentially, a bidding war ensues when coming in second place is very costly
(3)the winner-take-all explanation
golf, tennis
Discrimination in pay and hiring:
3 factors that may explain variation in pay among individuals
(1) innate ability: all else constant, those with greater ability contribute more of what fans pays to see and are, therefore, expected to earn more
(2) training and experience:
variation in willingness to train or gained experience will contribute to variation in income
(3) statistical discrimination (rules of thumb)
Fan discrimination: fan preferences result in lower pay and reduced hiring by race and gender only because of race and gender rather than ability.
Discrimination can be difficult to identify.
Talent supply side:
(1) opp cost of time
(2) worker job preferences
No comments:
Post a Comment