Competitive Balance in Major League Baseball
Butler, Michael R., American Economist
A number of economists have previously addressed the issue of competitive balance in major league baseball, in particular, the effects of the reserve clause and free agency on competitive balance. While there is general agreement that competitive balance in major league baseball has improved over time, there is no consensus as to the cause of this improvement. Among the suggested possible causes include the elimination of the reserve clause, a narrowing of market sizes among major league teams, and the compression of baseball talent. Unfortunately, the proponents of each of these possible causes have tended to test their hypotheses to the exclusion of competing hypotheses. This paper will present a model of the determinants of competitive balance which should allow the testing of each of the possible explanations.
II. Previous Research
Among those economists who have recently addressed the issue of competitive balance in major league baseball are Balfour and Porter , Scully , and Zimbalist .
Balfour and Porter  compare the variation of winning percentage for the population of teams both before and after free agency and find that that variance has been lower in the period of free agency (1977-89) than it was in the earlier period tested (1961-76). As a result, they "not only reject the hypothesis that the dispersion of winning percentage is higher with free agency, but conclude that it is indeed lower (i.e., that divisional races are closer) during the period of free agency. It appears free agency promotes competitive balance." (Balfour and Porter [1991, 16]). They go on to examine the correlation of team win percentage from year to year and find that year-to-year team win percentages are less likely to be significantly correlated during the period of free agency than in the earlier period studied. They conclude, therefore, that "the mix of wins and losses between the teams changes more rapidly with free agency than with the reserve clause." (Balfour and Porter [1991, 17]).
Scully  uses the standard deviation of team win percentages as a measure of the relative quality of play in major league baseball and notes that this measure has been declining over time in both the American and National Leagues. Based on his own work, as well as that of others,(1) Scully [1989, 97] rejects the hypothesis that free agency has adversely affected league balance but argues instead that "a narrowing of the size of the market in which teams compete has contributed to competitiveness on the playing field."
Recently, Zimbalist  has argued that it is the compression of baseball talent which has served as this leveling force at work in major league baseball. According to Zimbalist [1992, 97]
(i)n 1990, 0.00026 percent of the U.S. population
played major league baseball, or 35
percent less than the share who played in 1903.
At the same time, the population is increasingly
fit athletically, blacks have been allowed
in the game, Latins have entered professional
baseball in large numbers, and the availability
of baseball programs for training youth is far
more extensive today. Today's major league
ballplayers, then, are a smaller fraction of an
increasingly prepared population. The difference
between today's best, average, and worst
players is much smaller than it was twenty or
forty years ago. This results in greater difficulty
in selecting dominant players and in
greater competitive balance among the teams.
Thus, while there is general agreement that the elimination of the reserve clause and the introduction of free agency to major league baseball has not adversely affected competitive balance, there is apparently little agreement as to whether free agency has promoted competitive balance, or if other factors have been responsible for the narrowing of team performance over time--Balfour and Porter give credit to free agency, Scully suggests that it is due to a narrowing of market size, and Zimbalist argues that it is compression of baseball talent. …