The Economics of Losing

For the first assignment of my graduate career, I was supposed to interview someone that had their house foreclosed due to a subprime loan. I called what felt like a million people. I thought to myself, "I can't do this, I've made a horrible mistake. What do I do? I can't leave school, I have no other alternative in life." When I would talk to people counseling subprime victims they'd generally say something like, "These people had been taken advantage of once and now they don't want to feel duped by someone again. They're embarrassed that they've had their house taken from them and aren't particularly excited about the prospect of publicizing what happened."

Hey, I understand. I was sympathetic, though I thought that writing a piece about what happened to them and what they learned from it wasn't exploitative but instructive. Then two days later, the New York Times scooped me.

They had an article that quoted two--two!--people whose homes were being foreclosed.

Furthermore, they even got quotes from South Brooklyn Legal Services who specifically told me they were in the middle of a global crisis and they didn't have time to talk. You mean you didn't have time to talk to me. As silly as it sounds, I was genuinely frustrated that the New York Times beat me to a story.

Well, I guess I better get used to it, because they managed to do it again.

For class this week I was consider analyzing the economics of losing in baseball. I went to a sports business seminar a month and a half ago and Andrew Zimbalist, the de facto sports economist spoke. He talked about the ineptitude of revenue sharing in Major League Baseball.

This was the spur in my side to examine the issue. Unfortunately, on the very day I thought of looking into the issue, the New York Times printed this well written succinct op-ed piece by Michael Lewis.

Not Moneyball, Liar's Poker, Michael Lewis, but assistant professor of marketing at the Olin Business School at Washington University, Michael Lewis.

In the column he writes about the continued disparity in baseball and the disincentive losing teams have to succeed.

The problem is that transfers are based on local revenues. Teams that receive money are encouraged to invest it in their payrolls. But if a team actually attracts fans by fielding a winning team, its revenue-sharing receipts will be reduced.

Baseball's top earners give up some of their money to the smaller market teams, which is fair on some level. The New York Yankees have a huge fan base with New York City and its expansive greater metropolitan region. The same holds true for Boston. That is why these teams can afford to drop $30 million on Alex Rodriguez.

A team like the Tampa Bay Rays--they dropped the Devil from their name hoping to change the teams direction--only spent $24 million on their payroll. And they are probably not that far off in profitability as compared to the Yankees.
From the article:

The problem is that the teams receiving payments have come to use them as a primary source of income — rather than to build winning teams. The most extreme example has been the Tampa Bay Devil Rays. In 2006, this team had a payroll of about $35 million, $42 million less than the 2006 league average. Not surprisingly, it won only 38 percent of its games and filled less than 40 percent of its seats for home games. It also collected more than $30 million in revenue-sharing transfers. This past season, the team reduced its payroll to $24 million and had about the same level of success.

If the Rays collected $30 million from baseball and only paid the team $24 million, they've received a $6 million subsidy. Minus operating costs and add concession sales and meager ticket sales and even losers managed to earn good money.

So what's the incentive to win? Pride?

There is no incentive.

It's not often you become rich enough to own a sports team by being wildly profligate. Revenue sharing just encourages miserly behavior.

A system that rewards losing is a system in need of fixing.