Office Hours: Tuth 1:00-1:50, Tu 5:00-5:50 Or by Appointment

Economics 477

The Economics of Sports

Evan Osborne

254C Rike

775-4599

Office hours: TuTh 1:00-1:50, Tu 5:00-5:50 or by appointment.

The Economics of Sports

This is a course that investigates how elements of economic theory can be applied to professional and collegiate sports. Sports is at the end of the day a business and, like most human activities, involves a wide variety of constituencies – athletes, management personnel, fans, community leaders and others. The economist assumes that each of these actors systematically evaluates benefits and costs before making the choice that is in his rational self-interest. This assumption leads to several interesting ways to think about sports-related activity both on and off the field. The goal of this class is to enable you both to see sports in a different way and to gain a deeper mastery of economic principles.

The text is The Economics of Sports, by Michael Leeds and Peter von Allmen. It is optional. There are also a number of readings listed below. All of them are on reserve with the library. The readings marked with an asterisk are required. (The readings in the textbook are always optional.) The general approach will be to summarize the most important economic ideas at the beginning of each unit, with the exception of the discussion of regressions (used to test whether economic hypotheses are false), which is done at the beginning of the course.

Evaluation is based on two midterm examinations, a comprehensive final examination, and a group project. The exams are essay. The higher two of three midterm scores and the final each count for a third of your grade. The first midterm is Thursday, July 21. The second is Monday, August 1. The third is Thursday, August 11. The final exam is Thursday, August 18.

Schedule:

I. Industrial-organization issues: The structure of sports leagues

Key economic ideas: vertical integration, profit maximization, production function, competition, entry

A.  General

Leeds and Von Allmen, Ch. 3.

*John Ruggiero, Elizabeth Gustafson and Lawrence Hadley, “Technical Efficiency in Major League Baseball,” in John Fizel, Elizabeth Gustafson and Lawrence Hadley (eds.), Baseball Economics: Praeger (1996).

*Lawrence Hadley, Marc Poitras, John Ruggiero and Scott Knowles, “Performance Evaluation of National Football League Teams,” Managerial and Decision Economics 21, 2000, 63-70.

+Elizabeth Gustafson and Lawrence Hadley, “Arbitration and Salary Gaps in Major League Baseball,” Quarterly Journal of Business and Economics 34 (3), Summer 1995, 32-46.

B.  Free agency and arbitration

Leeds and Von Allmen, pp. 238-241.

+Lawrence Hadley and Elizabeth Gustafson, “MLB Salaries: The Impacts of Arbitration and Free Agency,” Journal of Sports Management, 5 (2), July 1991, 111-127.

+Gustafson and Hadley (1995).

C.  Revenue sharing, salary caps and competitive balance

Leeds and Von Allmen, pp. 242-256.

+Lawrence Hadley and Elizabeth Gustafson, “Increased Revenue Sharing for MLB?”, in Dan Marburger (eds.), Stree-rike Four, Praeger (1997).

*James Quirk, “The Salary Cap and the Luxury Tax: Affirmative Action for Weak-Drawing Franchises,” in Stree-rike Four.

*”Competitive Balance in Sports Leagues,” Chapter 7 in James Quirk and Rodney Fort, Paydirt, Princeton: Princeton University Press (1997).

II. Labor-economics issues.

Key economic ideas: marginal revenue product, tournaments, unions, theory of discrimination.

A.  Pay and performance

+Gerald Scully, “Pay and Performance in Major League Baseball,” American Economic Review 64 (6), December 1974, 915-930.

*”The Game Within the Game,” Chapter 6 in Joan Ryan, Little Girls in Pretty Boxes: The Making and Breaking of Elite Gymnasts and Figure Skaters, New York: Warner Books (2000).

+J.C.H. Jones, S. Nadeau, and W.D. Walsh, “The Wages of Sin: Employment and Salary Effects of Violence in the National Hockey League, Atlantic Economic Journal, 25 (2), June 1997, 191-206.

*L. Jon Wertheim, “Losing Their Grip,” Sports Illustrated, Dec. 24, 2001.

B.  Tournament Theory and Optimal Compensation: The PGA, NASCAR and Professional Tennis.

Leeds and Von Allmen, pp. 258-263.

*Ronald G. Ehrenberg and Michael L. Bognanno, “Do Tournaments Have Incentive Effects?”, Journal of Political Economy, 98 (6), Dec. 1990, 1307-1324.

*Peter von Allmen, “Is the Reward System in NASCAR Efficient?”, Journal of Sports Economics, 2 (1), Feb. 2001, 62-79.

C.  Collective Bargaining

Leeds and Von Allmen, Ch. 8.

D.  Discrimination

Leeds and Von Allmen, Ch. 9

+Dan Rascher and Ha Hoang, “The NBA, Exit Discrimination and Career Earnings,” Industrial Relations, 38 (1), January 1999, 69-91.

+Mark T. Kanazawa and Jonas P. Funk, “Racial Discrimination in Professional Basketball: Evidence from Nielsen Ratings,” Economic Inquiry 39 (4), Oct. 2001, 599-608.

+Stephen Shmanske, “Gender, Skill, and Earnings in Professional Golf,” Journal of Sports Economics 1 (4), November 2000, 385-400.

+Kahn, Lawrence M. “The Effect of Race on Professional Football Players’ Compensation, “Industrial and Labor Relations Review, 45 (2), Jan. 1992, 295-310.

E.  Principal-agent problems

+Joel Maxcy, “Do Long-Term Contracts Influence Performance in Major-League Baseball”?, Advances in the Economics of Sport, Vol. 2, 1997, 157-176.

III. Taxpayer subsidization of sports teams and mega-events.

Key economic ideas: subsidies, market failure, economic development.

Leeds and Von Allmen, Chs. 5-6.

IV. The NCAA and its control over college athletics.

Key economic terms: cartels, entry.

A. Why do colleges have sports programs?

Leeds and Von Allmen, 376-397.

+McCormick, Robert E. and Tinsley, Maurice. “Athletics and Academics: A Model of University Contributions.” In Sportometrics, Brian L. Goff and Robert D. Tollison (eds.). College Station, TX: Texas A & M University Press, 1990.

*Chs. 16 (“Party Round the Team”), 19 (“College Sports, Megainc. vs. Undergraduate Ed.”) and 21 (“The New 3 Rs”) in Murray Sperber, Beer and Circus: How Big-Time College Sports is Crippling Undergraduate Education, New York: Henry Holt & Co. (2000).

*Grant Wahl and George Dohrmann, “Welcome to the Big Time” (listed as “Losing Their Grip”), Sports Illustrated, Sept. 19, 2001.

*McCormick, Robert E. and Tinsley, Maurice. “Athletics vs. Academics? Evidence from SAT Scores.” Journal of Political Economy 95 (5), 1987, 1103-1116.

*Evan Osborne, "Motivating College Athletics," in John Fizel and Rodney Fort (eds.), Economics of Collegiate Sports.

B. Is the NCAA a Cartel?

Leeds and Von Allmen, 357-369.

+DeBrock, Lawrence and Hendricks, Wallace. “Setting Rules in the NCAA Cartel,” in Hendricks, Wallace, ed., Advances in the economics of sport Volume 2. Greenwich, Conn. and London: JAI Press, 1997, pages 179-201.

C. Are college athletes in the revenue sports exploited?

+Robert W. Brown, “The Revenues Associated with Relaxing Admission

Standards at Division I Colleges,” Applied Economics 28, 1996, pp. 807-814.

+James B. Long and Steven B. Caudill, “The Impact of Participation in

Intercollegiate Athletics on Income and Graduation,” Review of Economics and

Statistics 73 (3), August 1991, pp. 525-531.

V. International economics

Key economic ideas: comparative advantage, technological progress, globalization.

+Munasinghe, Lalith, O'Flaherty, Brendan and Danninger, Stephan. “Globalization and the Rate of Technological Progress: What Track and Field Records Show.” Journal of Political Economy 109 (5), October 2001, pp. 1132-49

*Tcha, Moonjoong and Pershin, Vitaly (2003). “Reconsidering Performance at the Summer Olympics and Revealed Comparative Advantage.” Journal of Sports Economics 4 (3), 216-39.

*Osborne, Evan. “Baseball’s International Division of Labor” (forthcoming, Journal of Sports Economics).

VI. Market efficiency: The market for sports betting.

Key economic ideas: efficient markets, zero profits.

+Gilovich, T., R. Vallone, and A. Tversky. "The hot hand in basketball: On
the misperception of random sequences," Cognitive Psychology, 17, 1985, 295-314.

*Boulier, Bryan L.; Stekler, H.O. “Are Sports Seedings Good Predictors? An Evaluation.” International Journal of Forecasting 15(1), February 1, 1999, 83-91,

+Gandar, John M., Dare, William H., Brown, Craig R., and Zuber, Richard A. “Informed Traders and Price Variations in the Betting Market for Professional Basketball Games.” Journal of Finance 53 (1), February 1998, 385-401.

+(5) Gandar, John, Zuber, Richard, O’Brien, Thomas, and Russo, Ben. “Testing Rationality in the Point Spread Betting Market.” Journal of Finance 53 (4), September 1988, 995-1008.

+Sauer, Raymond D., Brajer, Vic, Ferris, Stephen P., and Marr, M. Wayne. “Hold Your Bets: Another Look at the Efficiency of the Gambling Market for National Football League Games.” Journal of Political Economy 96 (1), February 1988, 206-213.

+Zuber, Richard A., Gandar, John M., and Bowers, Benny D. “Beating the Spread: Testing the Efficiency of the Gambling Market for National Football League Games.” Journal of Political Economy 93 (4), August 1985, 800-806.

+Osborne, Evan. “Efficient Markets? Don’t Bet on It,” Journal of Sports Economics, 2 (1), Feb. 2001, 50-61.