Abstract
Efficacy of industry policy implementation is enhanced when governments expedite resolution of private sector uncertainty. This study reinforces the mechanism through which production outcomes improve, via program evaluation analysis from professional sports. An alternative determination rule for allocating picks in reverse-order drafts—fewest games played when eliminated from playoffs—is considered in comparison with the current standard (fewest wins at end-of-season). Elimination timing is estimated via Monte Carlo simulation. Using MLB and NBA data from 2005–2013, results from a quasi-natural experiment show that when a team’s perverse incentive to underperform is effectively removed prior to its final game of the season, its subsequent performance improves significantly.
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Notes
While this ‘weakened’ incentive to win is emphatically independent from the contemporaneously introduced perverse incentive that is modeled here, the current study does not attempt to disentangle the two effects. This is an excellent candidate for future research by way of economic experiments.
In Major League Baseball (MLB), this late-season perverse incentive, while just as relevant to draft design, is not induced purely by maximizing the quality of the first-round pick. Rather, it also occurs via trading away their established players for as many developed (previously drafted) players as possible, in an attempt to maximize the likelihood of future success, through the hope that some of those trades succeed spectacularly.
Using the results that are reported in Sect. 4 of this paper, it is possible to estimate the extent to which this policy would improve competitive balance (see definition in footnote 4). Based on the sample (within-season) average Herfindahl index of competitive balance (HICB), the dispersion of win percentages reduces from 1.018 to 1.014 for MLB, and from 1.094 to 1.090 for the NBA.
Competitive balance is defined by Forrest and Simmons (2002) as: “…a league structure which has relatively equal playing strength between league members”. Empirical evidence on whether enhanced competitive balance results in higher demand from fans is mixed, though one can refer to Soebbing (2008) for an example that finds results that support this proposition for MLB. However, numerous theoretical papers, most notably Fort and Quirk (1995), conclude that drafts (among other restrictions) are ineffective at improving competitive balance when teams are modeled as profit-maximizers.
Even in the extreme case whereby a team chooses to underperform from the commencement of the season (a sub-optimal strategy, anyway), the proposed policy does not accentuate the existing incentives to do so. Yet, unlike the current policy, the proposal would still explicitly remove that incentive to underperform prior to the team’s final match of the season. Thus, it is still anticipated to improve overall outcomes.
The only identifiable difference between the proposed rule and the treatment is that under the former, the team of interest will (in most cases) have the additional incentive of improving its final rank (not possible under the treatment due to its design). Thus, the relevant estimates reported in Sect. 4 can be considered a lower bound of the actual effect.
Despite lack of empirical evidence here on the NHL and NFL, there is nonetheless every reason to believe that in a behavioral sense, the policy proposal is likely to be just as effective at reducing underperformance incentives as it is shown to be here. In the NHL, a total of 40 treatment observations are identified, with summary statistics that are broadly consistent with the policy’s behavioral inferences: The team of interest won 16 of these matches (extended to 20 including overtime and penalty wins), tied 7 (based on regulation time), and lost 17.
In unreported logit and linear probability models without fixed effects, these structural changes are controlled for via variables: HOU13 for Houston Astros after MLB realignment; S1112 for the NBA lockout season; NJN for New Jersey Nets; and SSS for Seattle Supersonics—all are insignificant.
In terms of reflecting behavior, the Monte Carlo simulations are preferred to the simpler ‘games difference’ method, which eliminates type-I errors, but induces type-II errors. Should the proposed policy be adopted, however, there are ways in which errors could be reduced dramatically (even eradicated); for example, running more simulations, or reconfiguring the schedule-sequence between inter-league/inter-conference matches to reduce required computational intensity of deriving the full combinatorial possibility set.
In MLB, the tie-breaker (for wins) is known before the season commences, so treatment cases are known with certainty at the moment the match of interest commences. The same applies with the NBA (no secondary criterion). This is unlike the other leagues, in which various secondary criteria are determined simultaneously with that result (or with final standings). Another similar issue relating to chronological sequencing of matches on any single day is likewise ignored for two reasons: (1) so as to treat all matches on day t on equal terms; and (2) opportunities to retract properly-concealable tanking strategies are limited upon short notice when results filter from other matches played earlier that day.
In the presence of fixed effects, estimates from a simple logit are both biased and inconsistent.
For a further robustness check, a variable with (log-ratio of decimal-quote) bookmakers’ odds, as another measure of relative-team quality, is added to the model with both-fixed effects. The results (not reported but available upon request) are once again very similar qualitatively.
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Acknowledgments
Earlier versions of this article were presented at the 84th Annual Meetings of the Southern Economic Association, Atlanta, November 22–24, 2014; as well as at the following invited external seminars: (1) Interdisciplinary Institute of Economic Policy, University of Buenos Aires, March 19, 2015; and (2) Department of Economics, University of Melbourne, March 30, 2015. The author would like to thank participants of the conference and seminars for their feedback; especially John Charles Bradbury, Brian Soebbing, Daniel Aromí, Daniel Haymann and David Byrne; as well as Rodney Fort, Oliver Gürtler and Jed DeVaro for their comments on even earlier drafts; and finally two anonymous reviewers and editor of this journal.
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Lenten, L.J.A. Mitigation of Perverse Incentives in Professional Sports Leagues with Reverse-Order Drafts. Rev Ind Organ 49, 25–41 (2016). https://doi.org/10.1007/s11151-015-9494-8
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DOI: https://doi.org/10.1007/s11151-015-9494-8