Sports Economics Research Paper

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Sports economics is arguably the most popular undergraduate elective in the collegiate economics curriculum today. Of the top 50 liberal arts colleges surveyed, 61% of the respondents offered an elective in sports economics. Details of the survey are available upon request. The rankings are based on the U.S. News & World Report rankings (“Liberal Arts Rankings,” 2009). Of the top 50 economics departments at research universities surveyed, 43% of the respondents offered a course in sports economics (Dusansky & Vernon, 1998). The Journal of Sports Economics has added special issues to keep up with the flow of scholarship, and more than one textbook has emerged on the subject. What is sports economics? Why might a topic such as sports stimulate pedagogical and scholarly interest among academics and students who usually pursue more serious subdisciplines, such as econometrics and mathematical economics?

Sports economics is the study of the allocation of scarce resources among competing desires in the context of sports. Although this definition is not very different from the definition of economics itself, it does reveal how the subdiscipline of sports economics was born. It also reveals the breadth of the field. Anything that carries the title of sports, from professional football to a lumberjack competition on ESPN, has the potential to stimulate a paper in this subdiscipline. Established economic scholars from other disciplines brought their standard tool kits to bear on professional and amateur sports data sets. At first, they studied baseball extensively because it was a sport that they had played and followed. Many of these scholars were tenured at prestigious research universities but undertook these projects because the sports industry was fun to study. At first, there were no textbooks for sports economics classes, and syllabi looked suspiciously like a list of applied microeconomics topics. Labor economists studied everything from wage discrimination to managerial efficiency. Industrial organization scholars promptly investigated the concept of market power on the field in wins and off the field in dollars, and environmental economists used contingent valuation methodology to determine the value of a sports team to a city or region. This research paper discusses the various strands of the literature in detail.

There are also other factors that contributed to the emergence of sports economics. Department chairs discovered that offering an elective in sports economics with a principles prerequisite was a good way to boost departmental enrollments. Other faculty members discovered that students who would normally run screaming at the mention of regression would sit patiently through the explanation of a multiple regression model that explained the determinants of competitive balance in the National Football League (NFL). With the advent of the Internet, sports data sets became readily available. Other students wanted to conduct applied econometric research in the context of sports with the aid of user-friendly econometrics software packages. At the Western Economics meetings (the formal partner for meetings of the North American Association of Sports Economists), the 8:00 a.m. sports economics sessions seemed to be drawing a crowd. Once in a while, participants would catch the guilty look of a macroeconomist who was having a little too much fun at that particular session. Economists are onto something here. Economics has not looked this appealing since the IS-LM model.

The rest of this research paper proceeds as follows. The various strands of the sports economics literature are discussed in each of the subsequent sections, as they apply to sports economics theory; the later sections discuss applied work, policy implications, and directions for future research. The major strands of the literature include the theory of the firm, the theory of the consumer, economic impact studies, discrimination in sports, and collegiate sports. In each instance, the research paper strives to point out the classic readings and some more current work in the area. A brief section covers some of the many sports economists who have been instrumental in the birth and progression of the discipline. The research paper concludes with some discussion about the future directions of the field. First, the research paper turns to a loose classification of topics in sports economics.

A Loose Classification of Topics in Sports Economics

Any classification of sports economics along traditional Journal of Economic Literature lines will be challenged by the differences between professional sports, amateur sports, and recreational sports. To be clear, professional sports are those where the contestants are paid for participation, amateur athletes are not directly paid for their participation by the contest organizers, and recreational sports are those undertaken for pure consumption value of participation and perhaps for the health benefits from exercise. Rather than attempt to construct an airtight classification that will be rendered obsolete by the evolving nature of the discipline, this research paper attempts to classify the literature based on the underlying big ideas in economics, such as the theory of the firm, the theory of the consumer, public policy regarding funding of stadiums, competitive balance, and discrimination in sports. In sports economics, as in economics, new branches often emerge from the cross-pollination of these big ideas. Any discussion of the classification of the literature on sports economics should begin with the original paper that brought economic ideas to bear on the sports industry. It is to that paper that this research paper now turns.

Origins of Sports Economics

Sports economists agree that the original work in the field was Simon Rottenberg’s paper on the labor market for baseball players (Rottenberg, 1956). In this paper, Rottenberg describes the existing rules of the baseball industry and their implications for competition. He discusses concepts such as the reserve clause, territorial rights, the drafting of minor league players into the majors, competitive balance, and market size. He also introduces the notion of a production function as it applies to sports, where the number of games (weighted by revenue) put on by a team is a function of its players and all other inputs, such as competing players, managers of both teams, transportation, and the ballpark, are considered a second factor of production. Rottenberg discusses the reserve clause—which allows the team to renew a player’s contract at a wage set by the team, at not less than 75% of the current year’s salary. He dismisses the argument that the reserve clause is desired to protect small-market teams (teams with smaller fan bases and lower revenues) from higher-paying large-market teams. Rottenberg cites the domination in the count of the number of pennants won by the Yankees and the St. Louis Browns as evidence of unequal player talent distribution. He also discusses territorial rights—the exclusive right to be the only Major League Baseball (MLB) team in a region—and the notion of competitive balance. Competitive balance refers to the ability of teams to have a roughly equal chance of winning a game. This topic is related to the uncertainty of output hypothesis, which maintains that there is greater fan interest when the outcome of who will win the event is fairly uncertain. Rottenberg discusses player drafts, territorial rights, and the reserve clause, which are all factors that impact the distribution of player talent and consequently impact the competitive balance in a league. Rottenberg then closes with his free market prescription for exciting and close baseball games. Many of the ideas raised by Rottenberg have grown into branches of sports economics today. For example, competitive balance has been an area of study in all of the major professional sports in the United States. Allen Sanderson and John Siegfried (2006) provide a 50th-anniversary perspective on Rottenberg’s original work and the strength of his conclusions after 50 years of industry developments.

The Theory of the Sports Firm

The key distinction between sports teams and rival firms in traditional economics models is as follows: Although sports teams seek to compete on the playing fields, they need their competitors to survive financially in order to put on a game or a match. This key point serves as the springboard for many of the departures from standard microeconomic models of the firm when applied to sports teams and leagues. Sports economics models of firms are based on three big ideas: (1) profit maximization behavior of sports teams and leagues, (2) market power of sports teams as both sellers of a unique product and almost exclusive employers of a highly skilled set of professional athletes, and (3) firms’ decision-making process about hiring players and coaches. This research paper turns to each of these big ideas regarding the sports firm in as much detail as a single research paper will allow.

Profit Maximizing Behavior

Several of the economic models treat a single team as the firm. Alternatively, some models deal with the league as a cartel or social planner, and each individual team is considered to be a member of this group. There is a healthy literature on modeling both firms and leagues in the context of competitive balance. Papers in this area cover the measurement of competitive balance and the optimal policies to promote competitive balance in a league. Those studies are discussed in the section on competitive balance.

A simple model of static profit maximization of a sports firm is contained in the leading undergraduate textbook on sports economics. Michael Leeds and Peter von Allmen (2008) define profits as the difference between revenues and costs. Team revenues are broken down into gate revenues, broadcast revenues, and licensing and other stadium-related revenues, such as concessions and naming rights. Costs are usually dominated by players’ salaries in the major leagues. Other costs include items such as travel, marketing, and administrative costs, including league costs.

There are more dynamic and complex models available as well. Most of these models deal with profit maximization in the context of multiple teams and the optimal policy for promoting competitive balance in a league. For example, Mohamed El-Hodiri and James Quirk (1971) develop a model of profit maximization for a sports team over time. They conclude that profit maximization of a given team and the promotion of competitive balance across a league are incompatible. Donald Alexander and William Kern (2004) explore some of the more dynamic elements that impact the franchise value of a team, such as team relocation, the presence of a new facility, market size, and regional identity.

In the traditional theory of the firm, the firm chooses its output level to maximize profits by taking market price to be either given in a competitive setting or subject to the constraint of the market demand curve if the firm is a monopolist. There is little debate over what exactly constitutes a unit of output. If a firm is making and selling jeans, for example, output is measured in terms of the number of pairs of jeans that are produced and sold. Another firm theory concept is the choice of product quality that a firm must consider. In sports economics, one has to consider the notion of output carefully. Is it just the number of games played by a team, or is it the winning percentage of the team that matters for profits? Is it merely winning or closeness of the outcome that boosts revenues? Thus, in sports, the concepts of quantity and quality are inextricably linked. In most other markets, one can segment the market by quality levels and then examine the output decision of the firm at a given choice of quality level. In sports, the number of games is not a team choice variable. It is set by the league. The quality of a team that a franchise chooses to field, however, is a choice variable. So it all comes down to two questions. Does winning matter (and at what cost)? What about the owner’s utility maximization problem?

Andrew Zimbalist (2003) provides an overview of the profit maximization debate. He concludes that owners’ objectives vary among leagues and that further research is needed. Alternative hypotheses of ownership do not preclude profit maximization but also include the owners’ utility as part of the objective function. Such utility may come from being seen as a mover and shaker in the big city, like Jerry Jones, the owner of the Dallas Cowboys, or simply one who gets to call the shots, like Al Davis, the owner of the Oakland Raiders. D. G. Ferguson, Kenneth Stewart, J. C. Jones, and Andre Le Dressay (1991) examine the premise of profit maximization and find support for profit-maximizing behavior. Ferguson et al. assume that profit maximization is synonymous with revenue maximization.

The main challenge in doing empirical work in this area is to come up with good data on the cost side of the equation. Team revenues based on attendance and average ticket prices can be easily calculated. Broadcast revenues and revenue-sharing agreements are made public as well. Player salaries are usually available, but bonuses, travel costs, and other general and administrative costs may not be as easily available for teams. How much does it cost a team to put on a single game? The lack of precise data on this subject can make profit maximization a tough hypothesis to test. However, for the interested reader, a simple win maximization model that should be accessible to advanced undergraduates is discussed in Stefan Kesenne (2006).

Sometimes, static profit maximization may not be validated by the data because of a combination of the owners’ desires to win and their goals to increase the long-term value of the franchise. Often, owners will try to break even each year while investing the profits back into player talent, coaching staff, or facilities. In the minor leagues such as AAA baseball, arena football, or lacrosse, the audience goes for the experience, and the weather may make a bigger impact on the attendance than the earned run average of the starting pitcher.

Market Power in Sports

Another characteristic of sports teams is that they usually possess some degree of market power in both the product and input markets. A team is usually the only seller of a particular professional sports product in the output market (monopoly) and often the only employer of professional athletes in that sport in that particular city (monopsony). Recent empirical evidence by Stacey Brook and Aju Fenn (2008) seems to suggest that NFL teams do possess market power over their consumers. When college football athletes look at professional football as a career, there are a limited number of leagues or employers. Such an employment scenario with a single employer meets the classic definition of monopsony.

Lawrence Kahn (2000) provides an overview of the studies that discuss monopsony and other labor market issues in sports. Harmon Gallant and Paul Staudohar (2003) examine how antitrust law in the United States has influenced the evolution of professional sports leagues. Stephen Ross (2003) considers 10 important antitrust decisions where courts have ruled against sports leagues and examines whether these decisions were in the best interest of the public from an economist’s point of view. In general, economists argue that a monopolist will charge a higher than competitive price and will appropriate a portion of the consumer’s surplus. Should the government then disband all operating professional leagues? What could possibly justify a legal monopoly in sports? Kahn (2003) argues that expansion to too many teams would lower player quality and that the optimum structure lies somewhere between a monopoly and a competitive solution. What complicates the issue further is that for every sold-out stadium in the NFL, there are additional fans at home that get to watch the game on television. This issue returns when this research paper explores the consumer side of sports economics.

Sports firms are supposed to hold power over their employees—and the players as well, because professional sports employment opportunities are somewhat limited. One of the oldest ideas in this area is the so-called invariance principle, which is an application of the Coase Theorem to sports leagues. Professional athletes have a unique set of skills and are in a position to generate an economic rent as a result. The invariance principle in sports economics states that regardless of whether the player or the owner controls the rights to the player, the mobility of players between teams should be the same. In the case of free agency, players reap the benefits by playing for the highest bidder. In the case of the team owning the rights to the player, the team may sell the player to the highest bidder. The origins of this idea are attributed to Simon Rottenberg (Sanderson & Siegfried, 2006). John Vrooman (2009) finds that if owners are win maximizing in nature, then they will erode their own monopsony power and compete aggressively for player talent. He states that the fact that most professional payrolls are about 60% of the revenue generated is evidence of the erosion of monopsony power by team owners. This is a budding area of policy in sports economics, but practical measurement of monopoly and monopsony power may be challenging because the details of cost and salary data are often private. This research paper turns next to the choices facing the sports team regarding talent evaluation and coaching.

Input Decisions of the Firm: Which Players and Coaches to Hire?

Because sports teams spend vast amounts of money on player payroll, it stands to reason that most aspects of the labor market are well documented. It is not the number of units of labor (players) or human capital (coaches and players) that is important. In most leagues, these numbers are set by league rules. What matters here is how league owners and unions agree to split total revenue among owners and players and the ability of the team to evaluate the talent of players and coaches.

Rodney Fort (2006) has excellent coverage of the history of player pay, the value of sports talent, and labor relations in professional sports. The traditional explanation is that players are paid their marginal revenue products. In sports, this is often defined as the product of their marginal contributions to each win multiplied by the revenue earned for the franchise by that win. There is some disagreement among scholars about whether players’ marginal revenue products are equal across teams. Stefan Szymanski and Kesenne (2004) argue that the marginal revenue of a win will be larger for a large-market team than for a small-market team.

So do players get paid their marginal revenue products of wins? What does the research say? In most leagues, such as the NFL, the league is a monopsony buyer of player talent, and there are some limits to compensation, such as a salary caps or disincentives such as a luxury tax. In a given league and within the limits of the salary cap, each team competes for the best players, thereby bidding up the wage for a player. In addition, players are often organized into unions so that overall negotiations between players unions and the team owners represent a bilateral monopoly (where a single buyer of talent, the team, faces a single seller of talent, the players union). In a bilateral monopoly, the equilibrium often comes down to the bargaining power of the two sides. If owners prevail in these negotiations, then through the use of salary caps or other restraints on compensation, players’ wages are restricted to levels below their marginal revenue products. On the other hand, if players unions prevail in negotiations, then the aggregate share of total revenue that goes to the players becomes larger. Given these nuances, in sports it makes sense to review the evidence whether players are actually paid the marginal revenue product of wins.

Scully (1974) is among one of the first to study the issue of pay and performance in MLB. He finds that in the 1970s, baseball players were exploited by teams under the reserve clause, which prohibited players from seeking competitive employment with other teams. He finds that baseball players’ average salaries over the length of their careers were only about 11% of their gross and 20% of their net marginal revenue products. Since then, many papers have been written about the determinants of wages and the impact of the type of contract (length, time in the contract, etc.) on performance. Alternatively, a more recent study by Vrooman (2009) finds that in most North American professional major leagues, players share about 60% of the revenues earned. Vrooman reports that all leagues except MLB have imposed salary caps just below 60% of league revenue. In short, with the advent of free agency, the balance of power between players and owners has evolved, and player salaries have risen.

What, then, are the determinants of an individual player’s salary? Factors such as the performance of a player on and off the field, race, the revenue of the team, the type of arbitration scheme, the contributions of teammates, and league salary caps influence the salary that a player receives (Barilla, 2002; Berri & Krautmann, 2006; Brown & Jepsen, 2009; Idson & Kahane, 2000). Kahn (2000) argues that the presence of rival leagues leads to higher salaries for players in baseball. Whenever competing leagues merge, the result is stronger monopsony power of owners over players and a decline in players’ salaries. In most major league sports in North America, players are drafted by a team, which gives the team exclusive rights to negotiate with that player. Within a given league, it is presumably the ability of a player to contribute to wins and boost attendance that determines his or her level of salary.

Todd Idson and Leo Kahane (2000) examine the team effects on player compensation in the National Hockey League (NHL). They find that players’ wages depend on their individual contributions and the impact of their teammates’ play on their productivity. Idson and Kahane (2004) have gone on to study the themes of discrimination, market power, and compensation in their subsequent papers on the National Basketball Association and the NHL. They have also investigated the impact of characteristics of workers, such as language skills, on the pay and performance of coworkers (Simmons, Kahane, & Longley, 2009). There is also a large literature on the determinants of coaches’ salaries and the retention of coaches. The interested reader is directed to the books mentioned for further reading at the end of this research paper.

The ability to spot talent is important in leagues where teams are constrained by league rules in the amount of money that they can spend on payroll. Player talent evaluation is often touted as the reason why small-market baseball teams such as the Oakland As and the Minnesota Twins can compete with large-market teams such as the Dodgers. The Patriot’s three Super Bowl wins under coach Bill Belichick in the age of the salary cap is often attributed to the ability of the organization to spot talent. Contrary to the popular misconception that coach Belichick was a film major, it turns out that he actually majored in economics. What characteristics make certain players successful in the big leagues? Both front office general managers and sports economists alike would love to know the answer to this question. David Berri (2008) has devoted considerable effort to measuring productivity on the basketball court and examines how success in college may or may not translate into success in the professional leagues. J. C. Bradbury (2007) is to baseball sabernomics (the analysis of baseball using economic principles and econometric tools) what Berri is to productivity in the NBA. This is a budding area of research.

In summarizing the theory of the firm, one has to return to the question of whether sports firms maximize profits. The preponderance of evidence indicates that the majority of professional major league sports franchises seek to operate in the black in the short run while maintaining the goal of increasing the value of the franchise. There is also a certain utility associated with owning a major league team. However, to most owners, this utility is more than a hobby because they strive to make their franchises financially viable and competitive on the playing field at the same time. This research paper turns next to the individuals that are responsible for the growth of sports into big business: the fanatic or the supporter, as they are known in Europe.

The Theory of the Sports Consumer

Readers may find this area easier to follow because most are consumers, if not sports consumers, and are thus familiar with the reasons and the ways in which consumers enjoy sports. Consumers attend sporting contests in person, watch them on television, or participate in sports. This research paper sets the participation aspects aside for now because the vast majority of consumers are not professional athletes. In each of these markets, fans that attend games or television audiences, the consumers, may be further divided into groups based on their intensity of preferences. Some fans are die-hard fans and live and die with the fortunes of their teams. Other casual fans, while interested, do not suffer these same highs and lows. Finally, there are those that happen to attend a sporting event or watch a game on television because it is just another entertainment option that they happened to choose. Some or all of these fans may choose to buy sports apparel either to proclaim their loyalty to their teams or as a fashion statement. All of these consumers have one thing in common. They are all maximizing their own utility functions.

Attendance at Sporting Events

Fans may choose to attend games or matches because they believe that the experience will enhance their utility, subject to their budget and time constraints. Do fans have more fun watching their teams win, lose, or win in close games? Which outcome yields the most fan attendance?

Sports economists claim that winning is a very important determinant of attendance (Davis, 2009; Welki & Zlatoper, 1994). Most fans prefer a close contest, with their teams winning in the end. There has been much work done on the uncertainty of outcome hypothesis (Knowles, Sherony, & Haupert, 1992). The age of the sporting facility also matters. Brand new stadiums and arenas tend to draw more fans. John Leadley and Zenon Zygmont (2006) find that increased attendance due to a new stadium lasts for about 5 years. The prevailing wisdom about superstar players is that they promote attendance through winning at home and sell out games on the road because everyone wants to see them play (Berri, Schmidt, & Brook, 2004). The demand for sporting events in North America is considered to be unresponsive to changes in ticket price (Coates & Humphreys, 2007). Are sports fans addicts? According to traditional studies on rational addiction, the past and expected future consumption of a good should be significant determinants of current consumption of that good. In other words, if a fan has attended the games for a given team in the past and plans on attending games in the future, that will impact the fan’s decision to attend games in the present. Fans are like addicts in that watching games provides excitement. Fans experience exhilaration when their teams score and feel down when their teams fall dramatically behind. Die-hard fans follow the fortunes of their teams throughout the off-season and miss the Sunday ritual of watching their favorite NFL teams. During the season, they plan on watching their teams every Sunday. It is in this sense that fans are likened to addicts (Becker & Murphy, 1998). Sports economists have begun to consider this question as well. Young Lee and Trenton Smith (2008) find evidence that Americans are rationally addicted to baseball while Koreans are not. The literature in this area is fairly thin because it is a recent development in the field.

Sports on Television

Most major league sports are broadcast on television in North America. The NFL has a blackout rule to prevent a reduction in ticket sales. If a game is not sold out 72 hours before kickoff, then it is blacked out in the local television viewing area. It tends to be the case that winning teams seldom have to worry about this rule, and about 90% of the games are sold out. In Europe, however, televising a game sometimes depresses attendance (Allan & Roy, 2008). The NFL currently has contracts with the major television networks to broadcast games through 2011. The value of these contracts is about $20.4 billion. This aspect of television viewing tends to be in the category of a public good. If enough people attend a game, a viewer can sit at home and watch the game without paying for a ticket. In some senses, this makes U.S. local television broadcasts nonrival and nonexcludable. The category of pay-per-view (PPV) is a little different. If one wants to watch an NFL team that is not being carried on the local television stations, one may have to purchase a special package from a cable or satellite television provider. Similarly, one may also purchase the opportunity to view certain other sporting events, such as boxing matches or soccer matches, which are available only on PPV. Either way, it is big business, and teams are able to extend their audiences beyond the confines of their stadia. There is a large literature on the economics of broadcasting and how certain systems impact consumer welfare. The consensus view among sports economists is that leagues that tend to share national television revenue equally, like the NFL, have greater competitive balance and consequently a greater demand for their product. On the other hand, leagues that have revenue imbalances, like MLB, where large-market teams like Los Angeles and New York have larger broadcast revenues, have less competitive balance and consequently a lower demand for their product. However, there is not much published academic research on the determinants of television ratings for sports events in North America. One reason for this may be that the data are proprietary information, and researchers may have to purchase data sets from a media research organization. This may be a potential area of expansion for the academic literature.

Sports Merchandise and Memorabilia

Consumers purchase sports jerseys, baseball hats, and other assorted items. Other consumers are collectors and purchase items such as baseball cards and other autographed memorabilia. There is a literature on baseball cards and the impact of a player’s performance and race on sales. However, the impact of championships or star players on sports apparel has yet to be investigated.

When one brings sports firms and consumers together, one often gets into the arena of public policy. It is to this subject that this research paper next turns its attention.

Sports and Public Policy

Even those who do not care about sports will probably have a few thoughts on the subject when asked whether they think their taxpayer dollars should be used to fund a new stadium for their local professional team. In the 1950s, most professional sports teams played in privately owned stadiums or arenas. Most professional football teams were the tenants of professional baseball teams and played football games around the baseball schedule. All professional hockey teams played in private arenas. Many professional basketball teams played in college arenas and played their games around the collegiate schedule. In the 1990s, U.S. cities spent $5,298 million on 57 new venues in the four major professional sports. The public’s share averaged $218 million for each of these venues. This is approximately 66% of the cost (Depken, 2006). This section considers some of the economic arguments presented for and against public funding for stadiums. Sanderson (2000) provides an excellent overview of this debate.

Proponents of public funding argue their cases on the basis of indirect and direct benefits of the team to the area. Indirect benefits—or benefits not accruing to the team— include the multiplier effect of job creation in the area due to team- and stadium-related activities. Teams often claim that the new stadium will be an engine of economic growth and revitalization for an area. Games draw crowds, and those crowds need to eat, drink, and shop. The direct benefits of a new stadium are those that accrue directly to the team and their fans. Teams contend that with the revenue from a new stadium, they can afford better players and contend for a championship. They claim that a new stadium enhances civic pride from living in a major league city. Last but not least, a new stadium would keep the team in town, and fans that attend games would retain their entertainment values, as would the fans that watch the televised games at home.

Critics of public funding for stadiums argue that the multiplier effect is overstated because of the so-called substitution effect. The substitution effect occurs when fans substitute attendance at sports events for other entertainment options like a movie at their local mall. Thus, the economic impact in the stadium area comes at the cost of spending at other entertainment venues. Critics claim that the benefits to consumers are not large enough to justify the subsidies given to sports teams. The consumer surplus generated from attending games is not large enough to justify the expenditures required to construct new stadiums (Alexander, Kern, & Neill, 2000). Critics also claim that stadium moves not only increase revenues through higher prices and attendance but also lower costs through favorable rental agreements. Most rental agreements provide attendance-based rents. This shifts the risk to the landlord, which in this case is the taxpayer. Robert Baade, Robert Baumann, and Victor Matheson (2008) find that mega events such as the Super Bowl have no statistically significant impact on taxable sales. Yet in the end, city after city builds stadium after stadium for professional sports teams. Why is this so? Fenn and John Crooker (2009) examine the willingness of Minnesotans to pay for a new Vikings stadium given the credible threat of team relocation. They find that on average, households are willing to pay approximately $530 toward a new Vikings stadium. These results were obtained from a representative urban and rural sample of 1,400 households in Minnesota. There are two plausible explanations for the stadium building boom. Either the civic pride aspects have been undervalued or stadium advocates have been politically more successful at outmaneuvering their critics. Past studies fail to find any statistically significant relationship of the impact of a stadium on the income in the standard metropolitan statistical area (Baade & Dye, 1988). Similarly, Brad Humphreys (1999) analyzes data from every U.S. city that had a professional football, basketball, or baseball franchise over the period from 1969 to 1994. He finds that, contrary to the claims of proponents of sport facility subsidies, the presence of a professional sports team or facility has no effect on the growth rate of local real income per capita, and it reduces the level of local real income per capita by a small but statistically significant amount. The problem with all the studies done on valuing civic pride is that they are surveys with no binding commitment on the part of the respondents to actually spend the money. There is room for a study that uses the experimental economics approach by giving participants a sum of money and a credible scenario of a relocation to see how much money they actually donate. Jesse Ventura, governor of Minnesota from 1999 to 2003, asked people to turn their tax rebates in to support funding a new stadium. The electorate greeted him with the usual response of bewildered amusement.

Having discussed the sports firm, the sports consumer, and how professional sports impacts public policy, this research paper turns to issues of competitive balance, discrimination, and collegiate sports.

Competitive Balance in Sports

Competitive balance refers to a situation where teams have a more or less equal chance of winning a game. This does not necessarily mean that all teams in the league must be of the same talent level. The NFL, in fact, takes past success into account while making the schedule for the next year. They pit stronger teams against stronger opponents, and weaker teams get easier opponents. Why should one care about competitive balance? U.S. sports economists argue that competitive contests are what drive attendance. European sports economists are not as concerned with competitive balance. In the English Premier League, for example, teams at the top vie for championships, while teams at the bottom strive to avoid relegation. The supporters are regionally loyal to their teams. They would love to win, but winning is not all that matters. The competitive balance literature bifurcates into two major strands. The first branch deals with constructing indices to measure and observe competitive balance. The second deals with policy prescriptions to promote competitive balance.

Sanderson and Siegfried (2003) present a useful review of the different measures of competitive balance. Measures range from simple measures of dispersion, such as standard deviations of winning percentages around league means, team means over time or at a point in time, modifications of Gini indices, and the deviations of the Herfindahl-Hirschman Index. There is also a considerable literature on the use of these measures in North American major league sports.

The second branch of this literature deals with both the measurement and policy prescription for a more competitive league via practices such as revenue sharing and the reverse order draft. For example, Andrew Larsen, Fenn, and Erin Spenner (2006) find that the NFL did indeed become more competitive as a league after the institution of the salary cap and free agency in 1993. There are also theoretical models that examine how competitive balance in a league may be improved. Crooker and Fenn (2007) examine the state of competitive balance in MLB and provide a league transfer payment mechanism for improving parity and, consequently, league profits.

Discrimination in Sports

Given that one can observe a player’s performance and compensation with some degree of clarity, sports economists have used the data to test for racial and gender discrimination in sports, both in the professional and collegiate arenas. Sports economics textbooks such as Leeds and von Allmen (2008) classify discrimination into employer discrimination, employee discrimination, consumer discrimination, gender discrimination, and positional discrimination. The interested reader is referred to their book for an extensive discussion of the theory and applied work on discrimination in sports economics. In general, most studies regress wages against performance statistics and race and gender variables to examine the role of race and gender. Other studies cover the values of baseball trading cards and the race of the player involved. The big idea in this area is that discrimination did exist in the past, both in terms of salaries and consumer preferences. For example, Mark Kanazawa and Jonas Funk (2001) find that predominantly white cities enjoy watching white players play for their hometown NBA team. However, both employer and consumer discrimination has been decreasing in recent years. Title IX and its influence on gender balance in collegiate sports is another big idea that dominates the literature on discrimination and college sports.

Collegiate Sports

The big elephant in the room is the unpaid professional: the college athlete. Collegiate athletic directors claim that college athletes for big-time programs bring in revenues that are redistributed to other programs in the athletic department and sometimes even to the rest of the school. The financial details of National Collegiate Athletic Association (NCAA) Division I programs are available in a report from the NCAA (2008).

Title IX and its impact on collegiate athletics have dominated the literature recently. Sports economists have also become fascinated with the question of a national playoff in NCAA football. Zimbalist (2001b) has an excellent book on the subject of college sports that covers the relevant issues. This topic is a research paper unto itself and goes well beyond the scope of an overview of sports economics.


The world of sports economics is constantly evolving. Some topics, such as the Olympics, bowling, golf, NASCAR, professional bass fishing, and distance running have not been covered in this research paper because of space limitations There is, however, a literature on each of these sports. Among the issues that present excellent opportunities for new research are the connections between gambling and sports. In particular, are there aspects to watching sports that are addictive? Another area of interest is the connection between sports and the joint consumption or depreciation of an individual’s health stock: Some fans may choose to drink beer while watching sports, and others may be motivated to participate in adult recreational sports leagues after watching an exciting contest. The economics

of youth sports and adult recreational sports has been largely unexplored; this will also be an area of interest in the years to come. Older topics that pertain to the impact of institutions and rules on sports, such as free agency and drug testing, will be examined time and again as the institutions and rules evolve. The economic impact of a sports team on a region will remain a constant topic of research as long as teams seek public funding. Studies and statistics on unlocking the keys to winning will also be around for quite some time. If a sport is televised and people watch it, sooner or later a sports economist will analyze it. Be prepared for the first study on competitive balance in the World’s Strongest Man competition; it could happen.

See also:


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