International Journal of Sport Finance
, 75-93, © 2009 West Virginia University
One of the most widely held notions in sports economics is that owners of profession-
al sports teams exercise monopsony power whenever and wherever they can. To cre-
ate countervailing power, players have responded by forming labor unions to bargain
with owners on a more level plane. But most collective bargaining agreements favor
veteran players, leaving younger players to the mercy of owners. In Major League
Baseball (MLB), for example, most players with three or less years of experience are
subject to the reserve clause which allows owners to unilaterally determine their
salaries. Only with experience comes eligibility for arbitration, free agency, and a more
equal bargaining relationship. While the particular rules pertaining to eligibility dif-
The Underpayment of Restricted
Players In North American
Anthony C. Krautmann
, Peter von Allmen
, and David Berri
Southern Utah University
Anthony C. Krautmann
is a professor of economics at DePaul University. His primary
research interest is in the field of sport economics, where the range of topics studied
include the Rottenberg Invariance Principle, shirking and long-term contracts, com-
petitive balance, and the wage determination process in professional sports.
Peter von Allmen
is a professor of economics at Moravian College. His research
focuses on labor-related issues in the professional sports industry.
David J. Berri
is an associate professor of economics in the Department of
Economics and Finance at Southern Utah University. His current research focuses
on the economics of sport, specifically the topics of consumer demand, competitive
balance, and worker productivity.
In this paper, we consider whether underpaying players restricted by the reserve clause
is a common practice in the three largest sports leagues in North America—the NFL,
NBA, and MLB. Our results are consistent with the hypothesis that owners of profes-
sional sports teams do exercise monopsony power whenever and wherever they can.
Although differences exist across the three sports, our results indicate that in general:
restricted players are underpaid; when the negotiating power of players rises, owners
are less able to extract a surplus; and, the greatest surplus tends to be extracted from
those who create the greatest amount of value.