OLET1145
Sports economics
Module 1
Are professional athletes paid too much?
highest-paid athletes . . .
1
Rank Athlete Sport
On-field
earnings
Off-field
earnings
Total
earnings
1 Cristiano Ronaldo Football 46.0 90.0 136.0
2 Lionel Messi Football 65.0 65.0 130.0
3 Kylian Mbappé Football 100.0 20.0 120.0
4 LeBron James Basketball 44.5 75.0 119.5
5 Canelo Álvarez Boxing 100.0 10.0 110.0
6 Dustin Johnson Golf 102.0 5.0 107.0
7 Phil Mickelson Golf 104.0 2.0 106.0
8 Stephen Curry Basketball 48.4 52.0 100.4
9 Roger Federer Tennis 0.1 95.0 95.1
10 Kevin Durant Basketball 44.1 45.0 89.1
Millions of US dollars. Source: The World's Highest-Paid Athletes, May 16, 2023, Forbes
. . . what about entertainers?
Rank Entertainer
Total
earnings
1 Phil Collins, Tony Banks, and Mike Rutherford 230.0
2 Sting 210.0
3 Tyler Perry 175.0
4 Matt Stone and Trey Parker (South Park) 160.0
5 Matt Groening and James L. Brooks (The Simpsons) 105.0
6 Brad Pitt 100.0
7 Mick Jagger, Keith Richards, and Ronnie Wood 98.0
8 James Cameron 95.0
9 Taylor Swift 92.0
10 Bad Bunny 88.0
Millions of US dollars. Source: The World’s 10 Highest-Paid Entertainers, February
13, 2023, Forbes
2
. . . compared to the rest
3
how much is “too much”?
• depends on your perspective
• what does economics tell us about worker pay?
• look at the basic hiring decision of any business
• how many workers to hire and how much to pay them
4
economics of worker pay
• what are the costs and benefits of hiring a worker?
• incremental cost – extra payroll the worker generates
• salary or wage ()
• incremental benefit – extra revenue the worker generates
• called the marginal revenue product ()
• the objective of hiring is to maximize profit
5
the hiring rule
hire workers as long as ≥
• if > , hiring increases revenue more than cost, so profit increases
• e.g., = 100 and = 90 → hiring increases profit by 10 → hire the worker
• if < , hiring increases revenue less than cost, so profit decreases
• e.g., = 45 and = 50 → hiring decreases profit by 5 → don’t hire the worker
6
• apply the same logic to sports teams
• team owner will hire a player as long as ≥
• upper limit for salary negotiation is the athlete’s
• lower limit is the athlete’s outside offer 0
• if < 0 the athlete will move to another team (or quit the sport, e.g., Joseph Sua'ali'i)

0
athlete’s preference
owner’s preference
contract zone
7
• is important – so how is it measured?
is a combination of two things . . .
1. the extra output the worker produces: marginal product,
2. the extra revenue per unit of output: marginal revenue,
= ×
• e.g., if an accountant completes one $400 tax return every two days, their daily =0.5 × $400 = $200 per day
• how does this translate to sports?
• what is the meaning of ‘output’?
• number of games? match attendance? TV audience? merchandise sales? . . .
• since the objective is winning, the number of wins is the obvious choice
8
9• e.g., if a player increases the number of wins by 2 and each win is worth $2m,
the team would be willing to pay the player up to $4m
• explains why pitchers (or midfielders) are paid more than catchers (or goalkeepers)
• a player’s is determined using lots (and lots) of data
• recent example: Ferguson, P., and Pinnuck, D. (2022) “Superstar productivity
and pay: Evidence from the Australian Football League,” Economic Record,
98(321): 166-190.
player’s impact on
number of wins
impact of a win
on team revenue = × = ×
10
• focus on ‘superstars’ – top 5% based on AFL player ratings system
• how do the authors determine a superstar’s impact on wins?
• superstars don’t play every game due to injury or suspension
• compare a team’s win-loss record with and without their superstars
• difference estimates superstars’ impact on wins
• use game-level data from 1,133 regular season games from 2013 to 2018
superstar’s impact on
number of wins
impact of a win
on team revenue = ×
• find that superstars increase the probability of an away win by 15%
• with 11 away games per year → = 0.15 × 11 = 1.65
• ‘average’ = $1.132m
superstar = 1.65 × $1.132m = $1.868m
• given a base of $250,000
superstar = $0.25m + $1.868m = $.
• maximum AFL salary in 2018 is $1.5m
• superstar is 30% below the wage predicted by the formula
• conclusion: AFL superstars are underpaid
11
12
• 2022, AFL player share is 28%, for NRL 26%
• (Peter V’landys has claimed NRL players receive 41% of league revenue)
• compare to
• NFL, NBA, NHL all have revenue-sharing agreements where players get ≈ 50%
• player share in European football: EPL 67%, La Liga 72%, Ligue 1 90% (skewed by PSG)
possible reasons Australian pro athletes get a low share
1. leagues are a monopsony
2. the salary cap
3. low bargaining power of player unions
4. lack of outside opportunity
13
1. monopsony
• a monopsony is a market with a single buyer
• some sports leagues represent a monopsony, especially for new players
• this is because teams have exclusive right to renew contracts with new players
• NBA 3-4 years, NFL 4 years, MLB 6 years, NHL 7 years, AFL 8 years
• only when a contract expires after this period is the player free to sign with other clubs
• no such restriction in European football
• since Bosman ruling (1995) end-of-contract players can leave club without a transfer fee
• European football is not a monopsony because there are many leagues
• how does monopsony affect wages?
14
• supply of available players to a monopsony sports league
• the league must pay higher wages to attract more players
players

supply of players
15

initial payroll = 50 × 100,000 = 5,000,000
payroll with 1 extra player = 51 × 101,000 = 5,151,000
incremental cost = 151,000= 101,000 + 50,000= + 100,000
50
= 101,000
51
the monopsony league
• basic hiring rule from earlier:
hire players as long as ≥
• is the upper limit to pay
• monopsony hiring rule
hire players as long as ≥ +
• − is the upper limit to pay
• monopsony results in a lower limit
• monopsony reduces the wages of new players
16
Krautmann et al. study (2009)
• apprentices (inexperienced players) are paid much less than
• consistent with monopsony
• most journeymen (experienced players) are free agents and can shop around
• paid closer to their as a result
• for comparison, 2009 minimum wages:
MLB $400,000, AFL $62,700, NRL $55,000
17
plenty of evidence new players have lower wages
League
/
Apprentices Journeymen
NBA 66%
NFL 50% 77%
MLB 19% 86%
2. salary cap
• team owners face a problem: competing for talent bids up wages
• individual owner efforts to succeed drives up payroll costs for everyone
• owners need a way to control themselves
• two solutions
1. impose a limit on team payroll – salary cap
• e.g., 2023 ‘hard’ salary cap is $224.8m for NFL, $17.9m for IPL, and $1.1m for AFLW
2. penalize teams with payroll that exceeds a certain threshold – luxury tax
• e.g., 2023 MLB teams pay a tax of 20% on payroll exceeding $233m
• tax revenue may be distributed to non-violators (NBA) or special projects (MLB)
• UEFA Financial Fair Play Regulations act like a luxury tax
18
19
Source: Team salary cap/payroll trackers available at https://www.spotrac.com
$m
Lions
Mets
Athletics
Eagles
PistonsMaple Leafs
Ducks
Warriors
2023 U.S. major league team payroll (ordered from highest to lowest)
Leagues with a salary cap
so why are Australian athletes relatively underpaid?
• monopsony and salary cap explanations apply to many leagues
• (exception is world football)
• neither can be a strong explanation for relatively lower pay in Australia
• low bargaining power of player unions
• AFL and NRL players have never gone on strike
• NFL, MLB, NBA, NHL have all had major labour disputes
• lack of outside opportunity
• reinforces the monopsony power of Australian leagues
• especially true for AFL players
• NRL players can move to rugby union (e.g., Joseph Sua'ali'i)
20
21
• 2022, AFL player share is 28%, for NRL 26%
• (Peter V’landys has claimed NRL players receive 41% of league revenue)
• compare to
• NFL, NBA, NHL all have revenue-sharing agreements where players get ≈ 50%
• player share in European football: EPL 67%, La Liga 72%, Ligue 1 90% (skewed by PSG)
possible reasons Australian pro athletes get a low share
1. leagues are a monopsony
2. the salary cap
3. low bargaining power of player unions
4. lack of outside opportunity
22
1. monopsony
• a monopsony is a market with a single buyer
• some sports leagues represent a monopsony, especially for new players
• this is because teams have exclusive right to renew contracts with new players
• NBA 3-4 years, NFL 4 years, MLB 6 years, NHL 7 years, AFL 8 years
• only when a contract expires after this period is the player free to sign with other clubs
• no such restriction in European football
• since Bosman ruling (1995) end-of-contract players can leave club without a transfer fee
• European football is not a monopsony because there are many leagues
• how does monopsony affect wages?
23
• supply of available players to a monopsony sports league
• the league must pay higher wages to attract more players
players

supply of players
24

initial payroll = 50 × 100,000 = 5,000,000
payroll with 1 extra player = 51 × 101,000 = 5,151,000
incremental cost = 151,000= 101,000 + 50,000= + 100,000
50
= 101,000
51
the monopsony league
• basic hiring rule from earlier:
hire players as long as ≥
• is the upper limit to pay
• monopsony hiring rule
hire players as long as ≥ +
• − is the upper limit to pay
• monopsony results in a lower limit
• monopsony reduces the wages of new players
25
Krautmann et al. study (2009)
• apprentices (inexperienced players) are paid much less than
• consistent with monopsony
• most journeymen (experienced players) are free agents and can shop around
• paid closer to their as a result
• for comparison, 2009 minimum wages:
MLB $400,000, AFL $62,700, NRL $55,000
26
plenty of evidence new players have lower wages
League
/
Apprentices Journeymen
NBA 66%
NFL 50% 77%
MLB 19% 86%
2. salary cap
• team owners face a problem: competing for talent bids up wages
• individual owner efforts to succeed drives up payroll costs for everyone
• owners need a way to control themselves
• two solutions
1. impose a limit on team payroll – salary cap
• e.g., 2023 ‘hard’ salary cap is $224.8m for NFL, $17.9m for IPL, and $1.1m for AFLW
2. penalize teams with payroll that exceeds a certain threshold – luxury tax
• e.g., 2023 MLB teams pay a tax of 20% on payroll exceeding $233m
• tax revenue may be distributed to non-violators (NBA) or special projects (MLB)
• UEFA Financial Fair Play Regulations act like a luxury tax
27
28
Source: Team salary cap/payroll trackers available at https://www.spotrac.com
$m
Lions
Mets
Athletics
Eagles
PistonsMaple Leafs
Ducks
Warriors
2023 U.S. major league team payroll (ordered from highest to lowest)
Leagues with a salary cap
so why are Australian athletes relatively underpaid?
• monopsony and salary cap explanations apply to many leagues
• (exception is world football)
• neither can be a strong explanation for relatively lower pay in Australia
• low bargaining power of player unions
• AFL and NRL players have never gone on strike
• NFL, MLB, NBA, NHL have all had major labour disputes
• lack of outside opportunity
• reinforces the monopsony power of Australian leagues
• especially true for AFL players
• NRL players can move to rugby union (e.g., Joseph Sua'ali'i)
29
Module 1 summary
• AFL and NRL players get a relatively low share of league revenue
• what explains these low shares?
• monopsony, salary cap exist in many leagues
• player bargaining power and lack of outside opportunities may be important
• next time: competitive balance
• related to athlete pay and salary cap
30
Module 1 summary
• economic theory of worker pay
• a player’s value to their team () is an upper bound to their salary
• AFL study finds wages 30% less than → players are ‘underpaid’
• AFL and NRL players get a relatively low share of league revenue
• what explains these low shares?
• monopsony, salary cap exist in many leagues
• player bargaining power and lack of outside opportunities may be important
• next time: competitive balance
• related to athlete pay and salary cap