Academic journal article Contemporary Economic Policy

Salary Inequality, Team Success, League Policies, and the Superstar Effect

Academic journal article Contemporary Economic Policy

Salary Inequality, Team Success, League Policies, and the Superstar Effect

Article excerpt

I. INTRODUCTION

The relationship between a team's salary distribution and its performance has been a growing area of research in academic studies of professional sports. A number of researchers have examined whether the salary structure of a team has an effect on its on field success. These studies have examined a number of major professional sports, including basketball, football, baseball, and ice hockey. (1) This research builds on the more general issue of the relationship between salary inequality and productivity that has been examined in the general labor economics literature.

There are essentially two competing hypotheses regarding the relationship between a team's salary distribution and its performance that currently exist in the literature. One hypothesis is that a wide variation in player salaries may enhance team performance. The argument is that a wide variation in player salaries may provide incentives for employees or players to put out greater effort to obtain these higher salaries. This idea was first put forth by Lazear and Rosen (1981) and is referred to as the tournament literature.

The second hypothesis is that greater salary inequality may lead to lower productivity, especially if cooperation between players (or workers) is an important feature of the production function. This view has been put forth by Levine (1991). That a narrower range in salaries might enhance productivity has also been argued by Akerlof and Yellen (1988). Both these hypotheses suggest that player performance is largely endogenous to the salary structure that is, that is player performance is based on the incentives provided by a team's salary distribution.

There is perhaps a third hypothesis, which is the focus of this paper. The view examined here is that there is a natural range in player abilities, and the salaries paid to players must be consistent with the expected performance and abilities of players which is determined in the market for players. In contrast to the models where player salaries are endogenously chosen for incentive reasons, the approach taken here is that it is a team's "salary distribution" that is endogenous. That is, a team's salary distribution is largely a function of the distribution of player types and hence player salaries that are chosen by the team managers.

This view might be called the optimal "constrained salary distribution" and reflects the fact that most professional sports teams must operate within a team payroll constraint, either set by the owners of the team, or a league enforced payroll cap, and are largely price takers in the market for talented players. (2) Given this budget constraint, the management of the team must decide on the allocation of the salary budget between player types. One possibility is that the team employs players of similar ability and hence would have little or no salary dispersion on the team. Another possibility is that the team hires one or more superstars and fills out the roster with a set of average ability types, and a few lower ability types, resulting in a significant salary dispersion on the team.

The argument advanced in this paper is related to the "superstar" effect as outlined by Rosen (1981). In particular, the nature of the sport may be such that a wide variation in abilities and hence salaries, as a result of one or more highly paid superstars, can have an extraordinary impact on a team's success. (3) It is clear that the nature of the professional sport might dictate which type of salary distribution is more conducive to winning. Some sports might have a weakest link feature, in that teams with substantial variation in abilities might have a more difficult time winning. Other sports may allow for a substantial variation in abilities and salaries on a team, with even the more successful teams having a considerable salary dispersion. (4)

This paper examines the relationship between a team's salary distribution and team performance in the context of a professional sports league. …

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