Abstract
One of the central externalities associated with large- vs. small-market teams is the potentially adverse effect of the market allocation of talent on competitive balance. Large-market teams are driven to buy more talent than their small-market counterparts, leading to long-lasting dynasties and perennial losers. Such an adverse effect on game uncertainty is likely to affect fans’ interest in the sport (under the Uncertainty of Outcome Hypothesis), and hence reduce league demand (Rottenberg 1956). To promote competitive balance, intervention by the Commissioner’s office may be warranted to override the free-market allocation. One competitive balance policy widely believed to have the ability to reallocate talent is a limit on team payrolls, known as a salary cap. While an effective salary cap will result in a deadweight welfare loss, this loss may be deemed worthwhile if the benefits associated with improved competitive balance more than offset the costs associated with the welfare loss.
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Notes
- 1.
This 8-year, $23.9 billion contract with five different networks yields each team about $100 million annually—accounting for about one-half of the total revenues of the typical NFL team.
- 2.
These details are from Article XXIV, Section 4 of NFL Collective Bargaining Agreement (2006–2012).
- 3.
In the NFL, the players’ share for the recently expired CBA was α  =  59.5%.
- 4.
Actually, the amount of bonuses carried over from year to year is those UTA bonuses that actually were attained the previous year minus the LTA bonuses which were not.
- 5.
When it comes to comparing player expenses to the salary cap, it is important to calculate a team’s “Cap Payroll” by summing the current-roster players’ “Cap Values”—that part of their compensation which is charged to the team’s salary cap. While Leeds (2008) concluded that one-third of all NFL teams had payrolls that exceeded the salary cap, this result mischaracterizes team compliance. Leeds compared the salary cap to a team’s “Total Payroll”—the total amount paid out by the team in any one season to players—rather than its cap payroll; it is the latter to which the salary cap applies.
- 6.
Only Minnesota and Philadelphia had insignificant mean values for CAPSPACE; for the other 30 teams, the mean value of CAPSPACE was significantly positive.
- 7.
The averaged CAPSPACE (in $2010) of all 32 teams went from about $13 million in the 2003–2005 era to about $17 million in the 2006–2009 era.
- 8.
An alternative model analyzing the allocation of talent, based on a contest-Nash strategy, was recently proposed by Szymanski (2004). This strategic approach is not pursued here because it assumes that each team’s share of talent is determined by its share of the aggregate payroll. Since the salary cap potentially constrains the team’s payroll budget, a model of talent allocation based upon the relative share of aggregate payroll does not make sense.
- 9.
Put differently, CAP1 in Fig. 9.4 is the level of a salary cap which just begins to bind on team L.
- 10.
In Fig. 9.4, point c corresponds to the same allocation of talent as in the competitive equilibrium, where team L’s payroll is PAYL* and is observable by the regulator. Thus, the regulator can easily determine the cap value at which the constraint just begins to bind on team L.
- 11.
In this case, we assume that CAP2 in not binding on team S. The case where the cap is binding on both teams is discussed later.
- 12.
The equalization condition, identified by Fort and Quirk (1995), occurs when all teams purchase the same amount of talent (i.e., \(\tilde{{T}^{\text{J}}}=(1/n)\overline{T}\text{\hspace{0.05em}}\forall \text{j} \); hence \( {\tilde{\text{PAY}}}^{\text{j}}={\tilde{\text{PAY}}}^{\text{k}}\forall \text{j},\text{k}\)).
- 13.
Notice that CAP4 is just small enough to make \( {T}_{4}^{\text{C}}\) tangent to MRPS. Although Fort and Quirk implied this value of the cap, they did not explicitly identify it.
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Krautmann, A.C., Solow, J.L. (2012). Salary Caps in a Model of Talent Allocation. In: Quinn, K. (eds) The Economics of the National Football League. Sports Economics, Management and Policy, vol 2. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6290-4_9
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