Handbook of Sports Economics Research

John Fizel

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351564304
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The wealth of data available on sports makes the industry a singular laboratory for observing economic and business behavior and theory. This unique reference on sports economics research provides a detailed perspective on the current state of the discipline. Covering both team and individual sports that include tennis, golf, and motor racing, the handbook explores what we know, what we do not know, what is stable, what is changing, what is certain, and what is controversial in sports economics. The expert contributors address issues in particular sports or comparisons among sports along major topics such as revenue and costs, labor markets, market structure, market outcomes, and public policy.

Part I

Introduction

1

Handbook of Sports Economics Research

An Overview

John Fizel

The Handbook of Sports Economics Research is a foray into an exciting and escalating market, the business of sports. In the past five years alone, there have been hundreds of academic sport-related publications, a plethora of new course offerings in sports economics, the development of new textbooks in sports economics, and a significant increase in the number of sessions at economic conferences devoted to economic analysis of sports.

Moreover, it is the business of sports that transforms the games into organized entertainment for viewing by a large segment of the population. Over the last twenty years, the public appetite for sports entertainment has provided the opportunity for skyrocketing franchise values, multi-million-dollar television contracts, average player salaries in excess of $1 million, flourishing markets for sports memorabilia, and hundreds of millions of public dollars directed toward stadium construction.

The growth in sports economics research, in my view, results from the unique opportunities the sports industry provides for both theoretical and empirical analysis. First, the sports industry generates a level of interest much greater than other industries. Issues in sports are prominent in daily reports in the press—including news, business, and sports sections—in discussions at the office water cooler or with neighbors or friends, and frequently are used as examples in books, speeches, and the classroom. Second, there are the peculiar aspects of the industry (Neale, 1964). The output of sports is a joint product where the firms in the industry must compete and cooperate for the league to thrive. In addition, the output of the industry is fixed so that the average winning percentage is always 0.5. Also, employment levels are fixed and complicated by several unique institutional rules about employee mobility, salary negotiations, and so on. Third, the basis of economic analysis is individual decision-making motivated by self-interest, which is a perfect fit with the sports industry. In sports, one can easily collect detailed measures of player and team productivity, identify individual decisions (e.g., player, manager/coach, or arbitrator decisions), and determine how judgments and performance change as incentive structures are altered. Finally, the economic analysis of sports employee productivity, labor relations, marketing, and profitability often parallel the analysis of business in general. The wealth of data about sports makes the industry a laboratory to observe economic and business behavior and theory not possible in other industries where there is a dearth of public information.

In the next chapter, Jewell addresses the quality of the research in sports economics. He finds that sports economics has moved from a diversionary and occasional academic exercise to a place of prominence and legitimacy within the economics discipline. Jewell reviews a number of articles that have been published in the best economic journals, highlighting the innovative methodologies, excellent data, and well-crafted arguments that are now common in sports economics research.

In short, sports economics is an influential and rigorous field of study that has experienced significant growth in a short time. The Handbook of Sports Economics Research is an opportunity to reflect on these changes and assess the state of the art.

The dynamic nature of the sports industry continually introduces new issues and uncovers new aspects of old issues. The chapters in this book examine what we know, what we do not know, what is stable, what is changing, what is certain, and what is controversial in sports economics. They present surveys of specific sports economics topics and suggest new and untapped avenues of research.

The Handbook of Sports Economics Research allows a reader to address issues in a particular sport or make comparisons along major topics of importance such as:

• Revenues and costs

• Labor markets (restrictions, discrimination)

• Market structure (league and association organizations)

• Market outcomes (competitive balance, the pursuit of winning versus profits)

• Public and league policy

Part II offers six chapters that review and analyze specific sports. Berri begins this part with an examination of the National Basketball Association (NBA). He notes that NBA research is dominated by studies on discrimination, perhaps because of the historically high minority participation levels. He finds mixed results for salary, hiring, and customer discrimination research, but concludes that definitive analysis is elusive because replication across different data sets and methodologies is absent. Berri continues with a review of player productivity as related to salaries and team objectives. In this context, he provides a number of interesting and provocative insights. Much more is available in the chapter.

Leadley and Zygmont turn our attention to the National Hockey League (NHL). They find that much of the research about the NHL, like that on the NBA, addresses discrimination. In this case, the focus is on discrimination toward French Canadian players. No consensus is apparent. Leadley and Zygmont turn next to the effect of player violence on player salaries and team attendance. They find attendance increases with the level of violence. They also find that players designated as enforcers seem to receive compensation for violence, which is consistent with the value of violence reflected in higher attendance. A unique aspect of labor market studies addressed in Leadley and Zygmont’s review is the joint production of teammates. Additional insights are offered about attendance and franchise location, each of which is particularly important in light of the positions held by players and owners that led to the cancellation of the 2004–5 NHL season.

Fizel and Hadley offer a synopsis of the research issues involving the unique, three-tiered labor market of Major League Baseball (MLB). Not surprisingly, they find that the reserve clause has been shown to consistently lower player salaries relative to salaries of free agents. However, the relationship of all players’ salaries relative to marginal revenue product is an increasingly unsettled issue, as new models of measuring MRP appear in the literature. Some research even indicates that with the choice of free agency, players early in their careers may opt to select to operate under the reserve clause as part of an optimal contracting arrangement with owners. The applicability of the invariance principle is also unresolved. New models of arbitration negotiation have resulted in useful insights into player and owner decision-making, but aspects of discrimination, MLB structural changes, arbitration panels, and more offer significant future research opportunities.

Matheson continues the analysis of specific sports with his survey of European football (soccer). Among other topics, Matheson discusses three aspects of soccer that are distinctly different than North American sports. First, players in soccer are frequently traded for cash settlements, not for other players or draft choices. Second, soccer is played in leagues that do not have a fixed set of teams. Teams may move from one league to another as they are promoted to a better league for a good team performance or relegated to a lower league for a poor team performance. Third, the playing and regulatory aspects of soccer are quite unique.

Humphreys takes us to the world of women’s collegiate athletics. The key issue is Title IX. Humphreys adds clarity to the discussion on definition, application, compliance, and effects of Title IX by removing the emotional rhetoric and applying an economic foundation for analysis. A number of additional issues are weaved into the presentation of the Title IX literature, with some intriguing and surprising conclusions. Humphreys also addresses gender regulation and compensation among coaches and players.

The last chapter of Part II focuses on individual sports and how individual sports fit into economic theory. As von Allmen points out, it is not how well one performs that matters in an individual sport, it is the rank order of one’s finish that counts. As a result, von Allmen reviews the research on rank-order tournaments and their relevance to optimal contest design and optimal compensation systems. He also reviews applications within a number of individual sports including golf, track, motor racing, tennis, thoroughbred racing, and more.¹

Part III offers two chapters that deal with issues relevant across various sports. Krautmann and Hadley offer an analysis of the literature on demand for sporting events. Although demand analysis may seem rudimentary and straightforward, it is not. Krautmann and Hadley explain the complications in measuring output and price, the foundation for any demand analysis. These complications, they find, cause some counterintuitive empirical results. Theoretically, one would expect a profit maximizing firm to price in the elastic portion of the team’s demand curve, but empirical evidence for this behavior is lacking. Sometimes, the research even finds a positive relationship between price and ticket sales. Krautmann and Hadley do their own empirical analysis to highlight the issues surrounding price as well as address other important demand determinants.

Next, Fort examines the existing research on competitive balance in North American professional sports. A peculiar aspect of sports described earlier is that the output of sports is a joint product where the firms in the industry must compete and cooperate for the league to thrive. Teams compete to be successful, but if one team is “too successful” and competitive balance within the industry is compromised, fans lose interest and the league fails. Fort points out that competitive balance is multidimensional, and, as a result, he assesses the competitive balance in sports using three different measures of competitive balance. He also incorporates an assessment of cross-sectional and time-series analyses using these measures. This review paints an interesting picture of where competitive balance is and how it has changed over time. Fort also suggests that policy choices by North American sports leagues appear to have little effect on competitive balance and that the research on competitive balance has only just begun.

Part III, the concluding part of the Handbook, examines the econometric tools and theoretical framework that have been underutilized in sports economics research and that provide an opportunity for several new threads of research.

This part of the book starts with Lee’s discussion of efficiency estimation. Efficiency is determined by how well a team or manager uses player talent to generate wins or team profits. Measuring and understanding efficiency is critically important in industries faced with salary caps, taxes on high payrolls, and the disparity in market size of teams, which almost mandates that small-market teams be efficient to survive. Lee begins with an overview of the existing literature, indicating the variety of estimation techniques used to assess production or cost efficiency. He also addresses the important role of using ex ante or ex post player talent data. He follows with a discussion of stochastic frontier models, how they can provide new insights into efficiency estimation, and how they can incorporate the peculiar aspects of sports economics.

Leeds and McCormick also explore the econometric possibilities in sports economics research. Their presentation addresses specification issues in crosssectional and time-series analysis. More specifically, some of the topics include sample selection bias, quantile regressions, and causality issues. Many relationships in sports involve endogenous variables, but seldom are endogeneity issues explicitly addressed. Leeds and McCormick explain the implications of this oversight and provide guidance on how to treat the issue. Also, comparative analyses of players within a sport focus on a distribution around the average performance or compensation. Leeds and McCormick demonstrate how quantile analysis examines the entire population not just the average player. In addition to addressing the foundations of time-series analysis, Leeds and McCormick suggest that causality analysis is underutilized.

In the final chapter of the Handbook, Szymanski creates a framework for theoretically analyzing contests, whether they exist as individual sports competitions or games played within a sports league. This framework and the analysis it permits is clearly in its infancy. In my opinion, Szymanski provides a result that will cause all of us to explore more about modeling contests. Typically, economists expect talent to be allocated to its most valuable location. Doing so, the marginal revenue of a win will be equalized across the league. Szymanski’s models find that this is not true. The implication of his result is that the total profits of the league are increased when talent is moved from weaker to stronger teams (is this the Yankee dream or what?).

In closing, I want to thank all of the contributors for a job well done. Their work would have been outstanding if they had only presented the results of the voluminous research in their topic areas. But, as you will read, they have also provided critical analysis of the results and have shown great insights into suggestions for future research streams. My comments about each chapter are limited, with many more topics to be discovered in each chapter. I believe that you will find the Handbook of Sports Economics useful, thought provoking and, hopefully, enjoyable.

Note

1. Men’s collegiate athletics (NCAA) was consciously omitted from the Handbook of Sports Economics Research because extensive and current reviews of this topic already exist. For more on the NCAA, see Fleisher, Goff, and Tollison (1992), Zimbalist (1999), and Fizel and Fort (2004).

2

Sports Economics

The State of the Discipline

R. Todd Jewell

Sports economics is firmly established as a legitimate field of economics. Given the apparent acceptance of sports economics, one might expect this would translate to academic self-respect and respect among ones peers. However, this appears not to be the case for those who study the sports industry. For instance, at a recent national conference frequented by sports economists, I heard various comments that lamented a perceived lack of respect for sports research within economics as a whole. This chapter provides some evidence that sports economics is a thriving and respected field of economics and that it has potential for continued growth. Most importantly, it appears high-quality sports-related research can be, and increasingly is, published in the best economics journals. This research is characterized by the use of innovative methodologies and outstanding data. In addition, a clear statement of the importance of the research to economics as a whole increases the probability of publication and should increase the impact of the research on future scholarship. My comments are designed to continue a dialogue among researchers who wish to analyze the position of the sports economist in the context of the entire economic discipline.

I define a sports economist as one who does research on sports-related topics. There are two unique, but not mutually exclusive, strains of sportsrelated research. First, in order of appearance in the literature, there is research that applies microeconomic theory to the sports industry in an attempt to understand the markets of sports. This strain can be referred to as “sports-microeconomics” and contains papers that develop or adapt economic theory for use in describing the sports industry. The history of such studies spans some fifty years. In the past thirty years, another literature has developed that uses sports data to test or explain various components of microeconomic theory. Goff and Tollison (1990) call this type of research “sportometrics,” comparing it to experimental economics that uses data from sporting contests instead of laboratory data. The intents of these two strains differ; sports-microeconomics has a narrowing focus, from the larger field of microeconomics to the smaller field of sports economics, while sportometrics has an expanding focus, from sports economics to microeconomics. Although there is clearly room for both in sports economics, the “sportometrician” is more concerned with acceptance outside the subdiscipline than is the “sports-microeconomist.”

It is incumbent upon sports economists to explain why their research can be generalized beyond the sports industry, something at which they have become increasing adept. Most arguments for the validity and importance of sportometric research hinge on two major issues. First, sportometricians have the advantage of excellent and detailed data. Specifically, sports data are often better suited for testing and analyzing economic theory than data from other industries. Second, the sports industry generates a level of interest that is greater than that of most other industries, and this is especially true for college students.¹ The most-used argument against the importance of sportometric research appears to be the following: Although sports data are almost always of better quality than data from other industries, the results are not easily generalized and are, therefore, unimporta...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Part I: Introduction
• Part II: Review and Analysis of Specific Sports
• Part III: Issues Across the Sports Industry
• Part IV: Econometrics and Theory in Sports Economics
• References
• About the Editor and Contributors
• Index