HakesSauerIJSFSept07 - The Moneyball Anomaly and Payroll...

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The Moneyball Anomaly and Payroll Efficiency: A Further Investigation Jahn K. Hakes and Raymond D. Sauer September 2007 ABSTRACT In our 2006 paper, we examined the implications of Michael Lewis’ book for the labor market in Major League Baseball. Our tests provided econometric support for Lewis' claim of mis-pricing in the baseball labor market's valuation of batting skills. We also found suggestive evidence that the dispersion of statistical knowledge throughout baseball organizations was associated with a sharp attenuation of the mis-pricing. This paper takes a closer look at the economic issues raised by Lewis for the baseball labor market. We extend the sample both backward and forward in time, seeking to determine how long the pricing anomaly existed, and whether the recent attenuation in the anomaly is robust to new observations. In addition, we refine the measures of skill used in our tests to more closely match the narrative account in Lewis' book. Using both our earlier and refined measures, we find that the pricing anomaly extends well before the period described in Moneyball , and that with some important caveats, the market correction in the post- Moneyball period persists. Finally, improvements in personnel management associated with a closer link between pay and performance may be responsible for the sharply increased correlation between winning percentage and payroll in recent years. Keywords: market dynamics and equilibrium; baseball salaries; pay and productivity; managerial cost-effectiveness Jahn K. Hakes, PhD, is an assistant professor in the Department of Economics and Management. His research interests include economic sabermetrics and empirical microeconomics. Raymond D. Sauer, PhD, is a professor and chair of the Department of Economics. His research interests include managerial strategy and organization of sporting competition. We are grateful to Frank Stephenson for helpful comments. Contact information: Hakes: Department of Economics and Management, Albion College, Albion MI; [email protected]; Sauer: Department of Economics, Clemson University, Clemson, SC; [email protected]
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1 The Moneyball Anomaly and Payroll Efficiency: A Further Investigation Introduction Michael Lewis’ Moneyball was an illuminating account of an innovative and successful sports organization. The book touched a nerve among people in a variety of business professions, the collection of papers in this volume providing ample evidence of that. But the content of the book poses challenges too, particularly to the academic discipline of economics. At the heart of the Moneyball story is the claim that, for the five year period 1999- 2003, the Oakland A's successfully exploited mis-pricing of skill in the labor market for baseball players. The book makes a compelling narrative case to support this claim. As social scientists however, we recognize that the proposition of mis-priced skills in the labor market can be cast in a framework that can be formally tested. Our recent paper,
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HakesSauerIJSFSept07 - The Moneyball Anomaly and Payroll...

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