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
9/24/2012
Leagues and competitive balance
2 downsides of exclusive territories: the possibility of rival leagues, competitive imbalance.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
9/23/2012
Property
Property is not a set of things but a set of rights and interests. Standard interpretations see property as consisting of rights to possess, use, manage, dispose of, and keep others away from things. Property is also a set of interests, for if the things we own become worthless we no longer have property. All property has always been, in a sense, government largesse. It is LAW that allows a given physical object to be legally acquired or owned by one person and not another.
Property is power compelling service and obedience, as is political sovereignty. We must distinguish between rights to have or do something and rights to merely try to have or do something.
What are the grounds for moral rights to property? One answer is that we are morally entitled to the products of our labor. An important proviso is that if a resource is scarce we should take only as much as would leave "enough and as good for others". To take more of a limited natural resource than one needs and can put to good use is contrary to the requirements of morality.
I have to say this is not plausible in the contemporary world. The unowned wilderness waiting to be appropriated no longer exists. Nearly always we mix our labor with an economic system, an industrial economy, and it makes little sense to think of the result as the outcome of our labor. A person's labor cannot be distinguished from the other labor it is mixed with in producing a product or contributing to production.
Interests, in contrast to rights, need not necessarily be respected for their own sake but are usually to be judged in terms of the further consequences of pursuing them. They are needs or desires or claims for some state of affairs to be effected. Justifiable interests are what we should be good for us in the long run if we were fully enlightened. They are what we would want if we were fully informed and wanted what would be good for us.
Rights are entitlements to something we can either do or have or not do or not have done to us. Interests are matters of more and less.
When interests conflict, we tend to find a moral solution to maximize the a particular criteria. But rights are not subject to maximizing.
Property is power compelling service and obedience, as is political sovereignty. We must distinguish between rights to have or do something and rights to merely try to have or do something.
What are the grounds for moral rights to property? One answer is that we are morally entitled to the products of our labor. An important proviso is that if a resource is scarce we should take only as much as would leave "enough and as good for others". To take more of a limited natural resource than one needs and can put to good use is contrary to the requirements of morality.
I have to say this is not plausible in the contemporary world. The unowned wilderness waiting to be appropriated no longer exists. Nearly always we mix our labor with an economic system, an industrial economy, and it makes little sense to think of the result as the outcome of our labor. A person's labor cannot be distinguished from the other labor it is mixed with in producing a product or contributing to production.
Interests, in contrast to rights, need not necessarily be respected for their own sake but are usually to be judged in terms of the further consequences of pursuing them. They are needs or desires or claims for some state of affairs to be effected. Justifiable interests are what we should be good for us in the long run if we were fully enlightened. They are what we would want if we were fully informed and wanted what would be good for us.
Rights are entitlements to something we can either do or have or not do or not have done to us. Interests are matters of more and less.
When interests conflict, we tend to find a moral solution to maximize the a particular criteria. But rights are not subject to maximizing.
9/22/2012
What is entrepreneur
The origin of the word derives from the French words entre meaning "between" and prendre being the verb "to take". The French economist Richard Cantillan related it to those who carried the risk in the economy. (Risk-taker)
The definition of entrepreneur: a person who habitually creates and innovates to build something of recognized value around perceived opportunities.
"recognized value" means creation of financial capital, social capital and aesthetic capital.
An entrepreneur is someone who knows the right people, can pick a good team, act quickly and make it all happen.
Reasons to be an entrepreneur: seek independence, wait to be his own boss, respond to a challenge, possibility of wealth
The low rating of money and wealth as a motivator with entrepreneurs is against the general perception of the entrepreneur. In reality money is a by-product of the business entrepreneurs, but it is this that people see and , so, assume it to be the main motivator.
internal locus of control: the extent to which people feel they are in control of what happens in their lives.
the main difficulty is one of the cultures where we are suspicious of people who become wealthy.
The definition of entrepreneur: a person who habitually creates and innovates to build something of recognized value around perceived opportunities.
"recognized value" means creation of financial capital, social capital and aesthetic capital.
An entrepreneur is someone who knows the right people, can pick a good team, act quickly and make it all happen.
Reasons to be an entrepreneur: seek independence, wait to be his own boss, respond to a challenge, possibility of wealth
The low rating of money and wealth as a motivator with entrepreneurs is against the general perception of the entrepreneur. In reality money is a by-product of the business entrepreneurs, but it is this that people see and , so, assume it to be the main motivator.
internal locus of control: the extent to which people feel they are in control of what happens in their lives.
the main difficulty is one of the cultures where we are suspicious of people who become wealthy.
9/16/2012
Efficient market theory (notes of math 210H)
There are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, objective, highly motivated and hardworking. h eir analytical models are widely known and employed.
Because of the collective ef orts of these participants, information is rel ected fully and immediately in the market price of each asset. And because market participants will move instantly to buy any asset that’s too cheap or sell one that’s too dear, assets are priced fairly in the absolute and relative to each other.
Thus, market prices represent accurate estimates of assets’ intrinsic value, and no participant can consistently identify and profit from instances when they are wrong.
Assets therefore sell at prices from which they can be expected to deliver risk- adjusted returns that are “fair” relative to other assets. Riskier assets must of er higher returns in order to attract buyers. The market will set prices so that appears to be the case, but it won’t provide a “free lunch.” That is, there will be no
incremental return that is not related to (and compensatory for) incremental risk.
I agree that because investors work hard to evaluate every new piece of information, asset prices immediately reflect the consensus view of the information’s significance. I do not, however,believe the consensus view is necessarily correct.
To beat the market you must hold an idiosyncratic, or nonconsensus, view.
Although the more efficient markets often misvalue assets, it’s not easy for any one person—working with the same information as everyone else and subject to the same psychological influences— to consistently hold views that are different from the consensus and closer to being correct.
Mutual funds are rated relative to each other. The ratings don’t say anything about their having beaten an objective standard such as a market index.
The fact that the Warren Bufetts of this world attract as much attention as they do is an indication that consistent outperformers are exceptional.
Every once in a while, then, people learn an essential lesson. They realize that nothing— and certainly not the indiscriminate acceptance of risk— carries the promise of a free lunch, and they’re reminded of the limitations of investment theory.
• the asset class is widely known and has a broad following;
• the class is socially acceptable, not controversial or taboo;
• the merits of the class are clear and comprehensible, at least on the surface; and
• information about the class and its components is distributed widely
and evenly.
If these conditions are met, there’s no reason why the asset class should systematically be overlooked, misunderstood or underrated.
Where might errors come from? Let’s consider the assumptions that
underlie the theory of efficient markets:
• There are many investors hard at work.
• They are intelligent, diligent, objective, motivated and well equipped.
• They all have access to the available information, and their access is
roughly equal.
• They’re all open to buying, selling or shorting (i.e., betting against) every
asset.
But it’s impossible to argue that market prices are always right. In fact, if you look at the four assumptions just listed, one stands out as particularly tenuous: objectivity. Human beings are not clinical computing
machines. Rather, most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes.
Whereas investors are supposed to be open to any asset— and to both owning it and being short—
the truth is very different.
A market characterized by mistakes and mispricings can be beaten by people with rare insight. h us, the existence of inefficiencies gives rise to the possibility of outperformance and is a necessary condition for it. It
does not, however, guarantee it.
Respect for ei ciency says that before we embark on a course of action, we should ask some questions: have mistakes and mispricings been driven out through investors’ concerted efforts, or do they still exist, and why?
All that means is that prices aren’t always fair and mistakes are occurring: some assets are priced too low and some too high. You still have to be more insightful than others in order to regularly buy more of the former than the latter.
Swallowing theory whole can make us give up on finding bargains, turn the process over to a computer and miss out on the contribution skillful individuals can make. The image here is of the efficient-market-believing instance professor who takes a walk with a student.
“Isn’t that a $10 bill lying on the ground?” asks the student.
“No, it can’t be a $10 bill,” answers the professor. “If it were,someone would have picked it up by now.”
The professor walks away, and the student picks it up and has a beer.
9/05/2012
Some thoughts on the high salaries of super athletes
If you analyze the salaries of athletes in 4 major leagues, you will see that
(1) the median salaries are always dramatically less than the average salaries
(2) the top salaries have been more than 10 times the median salaries since the 1980s
(3) salaries rises quickly
source of salaries
(1) endorsement
endorsement earnings typically double the income of male superstars, as for female stars, the multiplication can be 10 times
(2) salaries
even though sports stars are paid handsomely, they are not even in he same league with other entertainment superstars, generally speaking.
MRP(marginal revenue product) = MP * MR
MP: this particular player's contribution to winning percent
MR: marginal revenue generated by the player's contribution to winning (depend on fans' willingness to pay)
MRP is the input's contribution to the revenues earned by the team owner
MRP unravels the faulty logic behind the idea that higher player salaries drive up ticket prices. MRP theory dictates that player can only earn more if (1) they become more productive (MP rises) (2) fans increase their willingness to pay for their result (MR rises and the contributing factors can be population, size of cities, etc)
MR rises means that stars are more valuable in the fans' eye and owner will raise prices since fans are willing to pay more.
The reason players make more is that a change in some demand parameter (income, population, preferences) has increased fans' willingness to pay
(1) the median salaries are always dramatically less than the average salaries
(2) the top salaries have been more than 10 times the median salaries since the 1980s
(3) salaries rises quickly
source of salaries
(1) endorsement
endorsement earnings typically double the income of male superstars, as for female stars, the multiplication can be 10 times
(2) salaries
even though sports stars are paid handsomely, they are not even in he same league with other entertainment superstars, generally speaking.
MRP(marginal revenue product) = MP * MR
MP: this particular player's contribution to winning percent
MR: marginal revenue generated by the player's contribution to winning (depend on fans' willingness to pay)
MRP is the input's contribution to the revenues earned by the team owner
MRP unravels the faulty logic behind the idea that higher player salaries drive up ticket prices. MRP theory dictates that player can only earn more if (1) they become more productive (MP rises) (2) fans increase their willingness to pay for their result (MR rises and the contributing factors can be population, size of cities, etc)
MR rises means that stars are more valuable in the fans' eye and owner will raise prices since fans are willing to pay more.
The reason players make more is that a change in some demand parameter (income, population, preferences) has increased fans' willingness to pay
Worries over Three-gorge dam
i'm shocked to learn that dams cause so many troubles to local environment. The three-gorge dam in China has 5 major problems
(1) because of the imbalanced distribution of water resources, the chinese government mandates that water should be redistributed from south to north to enhance the development of north. But the problem of shortage of north china is largely due to man-made destroy of forests and wetland. Let alone the problem of fairness, government somewhat misses the real problem and causes some real trouble. For example, the dam damages the equilibrium of water supply and in 2006, sea water poured into Huangpu River in Shanghai 3 times because of the man-made change of river flow direction.
(2) the reservoir to some extent becomes a man-made big water pool and inevitably it changes the local weather. IN 2006, Chongqing suffered from unusual scorching weather. The ground temperature even approached 77 degree centigrade.
(3) the existence of dam break down the water path so that some kinds of fishes cannot swim back to upper reaches of Changjiang River to reproduce. The biodiversity is damaged.
(4) Changjiang River brings down to lower reaches delta large amount of silt. Silt stacks and forms the basis of Shanghai. The existence of the dam obstructs Changjiang river (reduce the risk of floods) but at the same time stops the silt. Without the continuous protect of silt, sea water "erodes" Shanghai.
(5) The construction of the dam stops the normal flow of the river, some chemical materials gather and eutrophication of water occurs.
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