Academic journal article Atlantic Economic Journal

Does a Salary Cap Improve Competitive Balance?

Academic journal article Atlantic Economic Journal

Does a Salary Cap Improve Competitive Balance?

Article excerpt

Without spending limits in professional sports, there is a danger that a few high-spending clubs will dominate each league. Theoretically, a salary cap would narrow the spread among teams in total player salaries, prevent an overzealous owner from monopolizing playing talent and, presumably, improve competitive balance.

The Gini index, which is typically used in statistical analysis to measure the distribution of income, is here used as a measure of competitive balance. The best teams in the National Basketball Association (NBA) with the most wins are considered to be the richest, and the worst teams with the fewest wins are considered the poorest. The Gini coefficient is based on the Lorenz curve, which relates the cumulative percentage of games won in a season to the cumulative percentage of teams, arrayed from poorest to richest. The closer the Gini coefficient is to 0, the closer the N'BA is to perfect equality (or competitive balance) in that season, while the closer this value is to 1, the closer the league is to perfect inequality in that season.

Prior to the 1984-85 season, the NBA adopted a salary cap. The GINI coefficient is regressed from 1974-75 through 2001-02 against a time trend (YEAR) and a binary variable (CAP) which is equal to 1 for seasons after the salary cap. The regression results are as follows:

GINI = -2.991 + 0.016YEAR + 0. … 
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