Rottenberg, Neale, and the Governance Policies of Sports Leagues

Abstract

In this chapter, we discuss the trade-offs faced by league officials and participants when they perform the difficult and necessary task of ratifying a set of rules for league governance. Our discussion is inspired by the valuable insights on the governance process made over 50 years ago by two economists, Simon Rottenberg and Walter Neale. In separate articles, they wrote that leagues need to adopt policies that equalize the productive capabilities of resource-rich and resource-poor members in order to create exciting and uncertain contests. To meet these objectives, the four major North American leagues (MLB, NBA, NFL, and NHL) have adopted policies such as revenue sharing, reverse-order amateur drafts, and salary restrictions in order to offset the natural economic advantages that resource-rich members have over their rivals. As is the case with any policy that disrupts natural economic forces, policy implementation must be done carefully or leagues might suffer costly or catastrophic unintended consequences of their decisions. This chapter serves as a point of comparison to Division I basketball’s governance policies, which we begin discussing in the next chapter.