December 16. 2008 by Keegan Hall.

Going to a professional baseball game is as American as apple pie.  Our “national pastime” has garnered fans of all ages and continues to have a dominant role in our society and culture.  As the popularity of baseball and other professional sports have increased over the years, so have the salaries of the athletes who play the game.  Many people complain about the enormous salaries that these athletes receive.  A common sentiment is that athletes are paid far more than their relative “worth” in comparison to such jobs as teachers, doctors and firefighters who all perform essential work that our society cannot do without.  In simplistic terms the massive difference in salaries may seem unjust.  However, through fundamental economic reasoning, we will discuss why athletes deserve their large wages as well as the consequences when athletes are paid too much.

As with any company, the owner is the person that ultimately determines the worth of a particular employee in the form of how much they are willing to pay for their services.  Owners of pro sports teams must carefully examine their potential investments (players) in order to avoid paying too much, which could have catastrophic financial implications.  In many cases the wage of a particular athlete is directly proportionate to the revenue in which they create for their franchise, at least that is the intention.  In 2000, Tom Hicks, owner of the Texas Rangers, signed Alex Rodriguez to one of the most lucrative contracts in baseball history- $252 million over 10 years.  Mr. Hicks did not arbitrarily arrive at this staggering number, but rather he had to estimate the “worth” of Rodriguez in terms of additional revenue he will create.

Marginal Revenue Product

One way to calculate a player’s worth is to measure their Marginal Revenue Product (MRP), which takes into account a player’s past performance, marketability potential, as well as physical attributes such as age, experience, height, etc. in order to gauge a player’s market price.  In this environment the player would likely be paid close to the highest expected MRP.  Since this decision is based largely on limited information and uncertainty, we typically see that athlete wages are far above the actual MRP.  The team that offers the largest wage above the actual MRP secures the player, which consequently results in the player being paid far more that he is actually “worth.”

Before offering Rodriguez a contract, Mr. Hicks had to compute the change in revenue from the franchise when employing one more unit of labor; in this case the additional unit of labor was Alex Rodriguez.  According to economic theory, the cost of employing Rodriguez must not exceed the additional revenue that he is expected to generate for the Texas Rangers.  If the additional revenue generated is less than the $25 million per year that it costs to employ Rodriguez then the investment is deemed a failure, as the team will lose money.  However, if the additional revenue exceeds the cost then Rodriquez’s outrageous wage is justified.

Ideally, the owner of a team expects that each of his athletes will generate additional revenue for their team beyond the wages the athlete receives.  If a players is able to generate multiple millions of dollars in revenue then his worth is just that- multiple millions of dollars per year.  Therefore it is economically justified for pro sports owners to offer such lucrative contracts because they understand the marginal benefit exceeds the marginal cost.  If the opposite were true and marginal cost exceeded marginal gain then the owners simply would not employ those athletes.

Miscalculating MRP and its Consequences

In 2004 Alex Rodriguez was traded to the New York Yankees.  A player being traded to a different team is very common in professional sports however this particular trade was rather unique.  In retrospect it appears as though Rangers’ owner Tom Hicks made a major miscalculation in determining Rodriguez’s worth.  A stipulation of the trade with the Yankees was that Hicks must pay $67 million of the $179 million remaining on Rodriguez’s $252 million, 10-year contract.  In the end, Hicks reduced his labor by one unit (Rodriguez) yet he is paying roughly $9.5 million per year and is receiving zero output since Rodriguez is not even on his team.  Hicks’ major blunder in assessing Rodriguez’ MRP had major financial implications on the team’s bottom line.

Supply and Demand

The large contract offered to Alex Rodriguez is a great example of economist Adam Smith’s theory called “diamond-water paradox.”  Water is an essential component to fostering life, however a diamond ultimately has little significance.  However a diamond is worth far more on market than water.  Fundamental supply and demand principals help unravel this anomaly.  Simply stated, the supply of water is far more abundant that that of diamonds.  Since diamonds are relatively rare, the demand is much higher and therefore the price is higher.  Conversely, water is not a scarce resource, which creates a low demand and thus a low price.  This is exactly the case with professional athletes.  There is a large demand for high quality athletes and owners will pay top dollar to sign them.  Additionally, the actual supply of high quality athletes is rather small.

This is not the case with the majority of other profession such as firefighters, gardeners or doctors.  Economist Sherwin Rosen proclaims some tasks have become so routine that any competent person will achieve the same outcome.  As such, it is much easier for a person to attain the skill necessary for a given task.  For example, there is not much difference in terms of outcome when the best gardener weeds a yard versus the second best gardener, or even the worst gardener as the task is rather restrictive.  This is not the case in pro sports.  The outcomes vary greatly.  Since winning is at a premium, owners will often overpay to secure superior talent no matter how minute the difference in talent may actually be. According to Rosen, sports are such that poor talent is an inadequate substitution for superior talent.  Said another way, pro athletes are far more specialized than their counterparts in other areas of the labor market.  Increased specialization leads to increasing differences in relative income.  So, whether or not you agree with athletes receiving large salaries is irrelevant.  The open market has determined that pro athletes’ outrageous salaries are economically justified.  However, if you’re a pro team owner, be cautious as a miscalculation can have dire financial consequences- just as Tom Hicks.

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July 7. 2008 by Keegan Hall.

If you are a sports fan or Seattleite they you’re well aware that our beloved Seattle Sonics (and my former employer of nearly 5 years) is packing up its wagons and heading east to Oklahoma City. Who is to blame? It doesn’t really matter now. The bottom line is the NBA no longer calls Seattle home.

I have attended countless Sonics games over the years. Although it has been quite some time since the Sonics have been a winning team (other than the 2005 playoff season) the excitement that was generated within KeyArena will be utterly missed by me and many other fans. I get goosebumps when I think about all the good times that were enjoyed with my Supes. From Ridnour’s behind the back passes to Kevin Durant sinking 3-balls, win or lose the games were a blast and I feel fortunate to have been a part of it both internally as an employee and externally as a fan.

I don’t think the people of Seattle truly realize what has happened in losing our team. For me it has yet to completely sink in. Come next basketball season we will reflect upon what was and only then truly appreciate what we had. The Sonics were more than simply a basketball team. They were a social enterprise that continually united the city of Seattle on and off the court. I suppose it’s time to turn the page and begin lobbying for a new NBA franchise. Although it would be great to have another basketball team in Seattle, the Sonics will be forever irreplaceable.

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February 18. 2008 by Keegan Hall.

The Slam Dunk Contest during NBA All-Star weekend has always been one of my favorite sporting competitions however over the past several years this event has definitely lost some of its appeal due to lack of creativity. With the exception of a few dunks, the vast majority of dunks have been seemingly regurgitated from previous competitions. Just when you think you’ve seen every possible dunk comes along someone who completely challenges your perception as to what is truly possible. Enter Dwight Howard.

Howard’s “Superman” dunk is already being touted as one of the greatest ever- and who could argue? Just before attempting the dunk, Howard torn off his Orlando Magic Jersey to reveal his alter ego and show his other uniform- a Superman costume complete with cape. The crowd instantly erupted into jubilation and the anticipation for what was about to happen quickly grew.

Howard paraded around the court which further hyped the crowd. The stage was now set. He began running towards the hoop and firmly planted his two feet before launching himself into the air. Howard’s sidekick, teammate Jameer Nelson, threw a lob pass that perfectly coincided with Howard’s jump. He grabbed the ball in mid-flight while soaring through the air- his head high above the rim. Gravity was truly being challenged during this incredible display of athleticism. Simply incredible!

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February 4. 2008 by Keegan Hall.

Well, well, well. All those cocky New England fans are finally mute since their Pats were unthinkably defeated by the New York Giants on Sunday night. Too bad for the Patriots as the stage was set for them to become the unanimous selection for greatest football team of all time after coasting through the entire regular season. After all, they had strung together 18 impressive wins in a row. They need just one more with to achieve perfection, however the Giants had other plans as they stunned the Patriots - and the world - with a 17-14 victory and ruined the Pats quest for perfection.

At the center of this unimaginable upset was a single offensive play by the Giants that may go down in the history books as the “best catch ever”. It has already being referred to simply as “the play”. If you watch the game last night then you know exactly what I’m taking about. With time running down in the 4th quarter, Giants QB Eli Manning narrowly avoided a seemingly inevitable sack. He spun away from the Patriot defenders and wound up to launch the ball as far as his arm would allow. The ball drifted down the field with ease. Manning’s wide receiver, David Tyree, leapt into the air making an unthinkable catch as he trapped the ball again his helmet with one hand! Yes, he caught the ball with one hand and his helmet! The pass was completed for 32 yard and set up the game-winning touchdown. Simply amazing!

Super Bowl XLII seemed to have it all: the clear favorite in the Patriots, an unassuming underdog in Giants and all the suspense you could handle. In the end, the night belonged to the Giants as they completed arguably the biggest upset in Super Bowl history. So, was it the best Super Bowl ever? My vote is an emphatic “YES!”

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January 31. 2008 by Keegan Hall.

I’ll admit it…I love sports. A lot. My wife can attest to this as virtually all of my tv time is spent consuming various sporting events. Although basketball is by far my favorite, I must say soccer is second. Yep, soccer. Not football or baseball. Soccer.

Soccer is by far the most popular sport in the world but, interestingly enough, the vast majority of Americans could care less. I cannot figure out why there is such apathy towards this amazing sport. Have most Americans not seen a pro soccer match? I’m not talking about the MLS (although the league is getting better every year). I’m referring to a pro match in Europe. The game is absolutely incredible! European soccer combines pure athleticism with uncanny finesse unlike any other sport in the world. These athletes are truly gifted.

While in college I had the opportunity to study abroad in Rome, Italy. Wanting to experience all that is Italian, I made my way to a Roma soccer match. Wow! That’s all it took. I was hooked and went back each weekend for more!

Sure, there are many dedicated sports fans here in the USA but the commitment of these fans pale in comparison to those in Europe. No contest. These Italian soccer fan would die for their team- literally. In fact, one of the matches I attend, Roma vs Juventus, I almost died. Well, I would have if the Juve fans had found out my allegiance to the Roma squad.

This was one of the biggest matches of the year and it was nearly impossible to get a ticket. Quickly running out of options, I had no choice but to purchase tickets from a scalper. This weaselly Italian assured me these seats were on the Roma side of the field. Of course, me being the naive American, I believed him. I went strolling in to the arena covered from head to toe in Roma apparel. When I got to the gate the ticket taker took once look at my seat location and replied “I can’t let you go in there dressed like that.” What? What’s the big deal? Apparently it was a big deal.

Luckily had an impartial jacket with me. I quickly threw the jacket on and zipped it up as high as a could. If you looked closely you could still see a glimmer of “Roma red” inside my collar. I literally had to hold my collar tightly closed for the entire game.

But holding my collar shut wasn’t the most difficult part- it was dodging the various debris that was flying through the air. The hatred between these two teams actually fuel fans to throw items (water bottles, coins, rocks, etc) and each other. Although I was riveted to the match, I had no choice but to keep one eye fixed on permantant look out.

Needless to say, this was quite an experience that left an everlasting impression on me. Soccer embodies competition in its purest form. This competition is not only felt by each player but also personified by each fan. Soccer is simply amazing and it’s about time that more sports fans in American take notice.

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