KrautmannEI1999

KrautmannEI1999 - WHAT'S WRONG WITH SCULLY-ESTIMATES OF A...

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WHAT'S WRONG WITH SCULLY-ESTIMATES OF A PLAYER'S MARGINAL REVENUE PRODUCT ANTHONY C. KRAUTMANN* Estimates of baseball players 'marginal revenue product, derived from the meth- odology introduced by Gerald Scully over 20 years ago in the American Economic Review, suggest that even the highest-paid players are grossly underpaid. But given the fiercely competitive bidding process for free agents, it is hard to believe that owners can maintain salaries significantly below marginal revenue product. In this paper, an alternative approach for estimating a player's economic value is pro- posed. It uses market information gleaned from free agent contract negotiations. When applied to the less-mobile segment of the player market, this method yields much more reasonable estimates of players'marginal revenue products. (JEL L83) One needs to be cautious about the results, since the estimates of player marginal products are crude (Scully [1989, 168]). Our MRP estimates do not have a par- ticularly impressive correlation with player salaries (Zimbalist [1992, 190]). I. INTRODUCTION People often wonder how professional ath- letes could be worth the mega-dollar salaries they receive. For example, Michael Jordan was paid about $35 million last season by the Chicago Bulls, while Albert Belle was paid $10 million last season by the Chicago White Sox. Economic explanations have focused pri- marily on the amount of revenue generated by the player, especially as it pertains to labor market structure and the bidding process. One possibility is that team owners pay younger players less than they are worth in order to cross-subsidize the superstars. This would help explain why most professional sports leagues display a very definite two-tiered sal- ary structure, distinctly split between younger indentured players and veteran free agents. Another possibility is that the superstars com- * I would like to thank an anonymous referee for com- ments on an earlier draft, Paul Novak for valuable research assistance, and Sue Schoeben for her editorial advice. Krautmann: Professor, Department of Economics, DePaul University, Chicago, Phone 1-312-362-6176 Fax 1-312-362-5452 E-mail akrautma@wppostdepaul.edu mand such high salaries simply because they are able to generate large amounts of revenues for their team owners. In either case, most attempts at explaining this phenomenon be- gins with some type of estimation of the athlete's marginal revenue product (MRP). Professional baseball is used more often than other sports primarily because baseball players' marginal products are fairly indepen- dent, making it easier to isolate a particular player's contribution to his team. The seminal work on the pay versus performance of Major League Baseball players was provided by Scully [1974]. While the approach outlined by Scully has undergone much scrutiny, it re- mains one of the primary methods of estimat- ing a player's MRP. It has even been used in arbitration hearings, including those involving
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This note was uploaded on 09/21/2011 for the course ECON 33974 taught by Professor Barbaraross during the Spring '09 term at Hawaii.

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KrautmannEI1999 - WHAT'S WRONG WITH SCULLY-ESTIMATES OF A...

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