Invited Contribution

Resource Allocation and Income

Distribution in Professional Team Sports
SIMON ROTTENBERG
University of Massachusetts-Amherst

Professional team sports is an industry composed of firms that are called

&dquo;teams.&dquo;
The product of the industry is a form of entertainment, and other industries produce
imperfect substitutes for its product.
The revenue received by the industry is the measure of the quantity of entertain-
ment it produces; alternatively, the measure of that quantity is the cost of the
resources employed by the industry to produce entertainment. The number of pay-

ing customers who are in attendance at ballparks and stadiums and the number who
see or listen to television and radio broadcasts are a proxy for the quantity of the

industry’s output.
Entertainment is produced by the team sports industry through the medium of
games. Games are contests between pairs of teams in which the rules of play and the
definition of &dquo;winning&dquo; is known in advance of play.
Games are of diverse qualities.
The quality of a game is higher, the more the grace and skill with which it is pro-
duced, the larger the number of instances of extraordinary physical achievement
that appears in it, and the more uncertain its outcome before the start of play and for
a long period during play. Oppositely, the quality of a game is lower, the less the

grace and skill with which it is done, the smaller the number of physical events in it
which ordinary persons cannot accomplish, and the greater is the ex ante certainty
of its outcome.
The highest degree of uncertainty occurs when the probability that any given
team will win in any given (two-team) game is .5.
Commonly, the industry is organized into coalitions of teams, called &dquo;leagues,&dquo;
in which sets of paired contests, called &dquo;seasons,&dquo; are specified so that not only the
winning of games but also the winning of championships is defined.

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Leagues are combinations that agree on the number of teams of which they are to
be composed, specify rules of entry for new teams, govern the allocation of
resources (especially players) among teams, and assign markets to teams; a team

usually monopolizes its market within its league.

Professional sports are distinguished from nonprofessional sports by the event
that players for professional teams are paid for their services.
Like firms in other industries, teams employ scarce resources in producing
entertainment. Those resources include the services of players and administrative
staff, transportation, stadiums, playing equipment, and resources employed in the
search for talented players and in the improvement of their playing skills. These
resources have alternative uses in other industries.
Consumers of the product of the professional sports industry are those who buy
the right to watch games directly and those who watch indirectly by way of televi-
sion or radio broadcasts of games. &dquo;User&dquo; charges are not usually imposed on indi-
rect watchers; television and radio networks and stations buy the right to broadcast
from leagues and teams and recoup their costs buy selling advertising space to com-
mercial firms during short and frequent intervals when games are interrupted.
The revenue of teams derives, in the main, from the sale of tickets for attendance
at games and from the sale of broadcast rights.
What is the appropriate size of the professional sports industry? What is the
quantity of resources that is socially optimal for it to command, rather than permit-
ting them to turn to other uses?
The principle that defines the social optimal size of this industry is not different
from that which governs other industries. That quantity of entertainment should be
produced by professional sports such that the return on investment in that industry
shall be &dquo;normal&dquo; or the same as the return on investment in alternative lines. Ful-
filling this condition fulfills another: The social value of the resources employed in
the production of the last unit of entertainment should be equal to the value of the
utility that society derives from the consumption of that unit. &dquo;Last&dquo; is used here in a
size, not a chronological, sense; it is a randomly chosen number of a, say,100-game
seasonal set (of some level of quality) and not the final game at the end of the
season.

Thus, the industry can be suboptimally too small or too large. If it is too large,
some resources employed to produce professional sports games will be more pro-
ductive if they are released by that industry and put to work in other industries
instead.
The fulfillment of the socially maximizing conditions for the determination of
the optimal scale of the professional sports industry does not require the explicit
mensuration of obscure quantities such as the costs and consumption utilities of
&dquo;last games,&dquo; nor is it even necessary to search for proxies for those quantities that
are more conveniently measured. If the institutionalized behavioral rules of the

sports industry enforced something approximating competition and if there were

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Rottenberg / RESOURCE ALLOCATION AND INCOME DISTRIBUTION 13

freedom to enter the industry and to exit from it, the market would cause the maxi-
mizing conditions to be fulfilled, and the socially appropriate quantity of resources
would be employed in the production of games.
Teams and sets of teams (leagues) offer games. Either the revenues derived from
ticket sales and from the sale of broadcast rights do exceed the cost of producing
games by a sufficient quantity to yield a normal return on investment or they do not.
If they do, those teams and sets of teams survive and are performing a socially use-
ful service by employing resources in the production of games rather than permit-
ting them to be put to some alternative use. If revenues do not cover costs and a
normal return, teams and leagues go under, cease play, and disband, releasing
resources to more productive use elsewhere.
This is a simple and, therefore, only an approximately correct prescription of the
process by which markets in professional team sports in which there is freedom to
enter and exit would compel national, maximizing behavior and the achievement of
optimal size of the industry.
Two qualifications need introduction.
In the language of the economist, &dquo;sunk costs are sunk.&dquo; That is, if stadiums are
constructed that are specialized to the production of games and have no other use, it
is socially appropriate for professional sports to command resources and go on pro-
ducing games, if all other costs of production excluding stadium costs are exceeded
by revenues. Before a stadium is built, it is socially necessary to take its cost into
account in making estimates of whether there will be sufficient consumer interest in
games to be played in it so that enough revenues will be forthcoming to cover costs.
After the stadium is built, however, and if it has no other use than as the site for
games, its cost to society is appropriately estimated to be zero; its cost should be
given no weight in the social reckoning of whether relevant teams and leagues
should survive.
The second qualification is derived from the psychic income that is said to be
produced for investors in professional sports by this investment activity. Such
investment has the properties of a consumption activity for investors. It is said that
team owners will insist that their investments in other lines yield them positive
returns, but they are prepared to suffer losses in their sports investment. If owners of
teams are willing to carry on with financially losing teams, they are engaged in acts
of philanthropy. They make gifts to consumers of professional sports games who
are permitted to observe games on the cheap. Income is redistributed from owners
to fans. Because this is a voluntary activity of the owners, it does not violate the
principle of social maximization that such teams survive and employ resources in
producing games, even if revenues fall short of costs.
The conditions that define the social optimum for the aggregate of all profes-
sional sports apply also to separate professional sports, and the discipline imposed
by competitive markets that compels the fulfillment of those conditions in the
aggregate also compels fulfillment separately.

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14 JOURNAL OF SPORTS ECONOMICS / February 2000

If more resources are employed in the production of games per time period by
the football component than the soccer component of the sports industry, this
means that the football subindustry is the larger of the two. With freedom to enter
and exist, football is larger because, given the cost of producing games, consumers
are willing to spend more money in buying tickets to football games and more time

watching football game broadcasts than they are willing to spend for soccer. Market
discipline does not permit the soccer subindustry to command as many resources as
does football. The separate components of the professional sports industry come to
be of optimal scale.
In the same way, the market compels socially purposeful outcomes in the profes-
sionalization of some sports and not others. If lacrosse were not professional, it
would be because the utility derived from its consumption, when monetized, is less
than the money value of its costs of production.
Thus, the institutionalization of freedom of entry into and exit from professional
sports, by teams and leagues, and of competition for resources would tend to cause
the achievement of socially optimal outcomes with respect to the size of the pro-
fessional sports industry, the relative sizes of subsectors of that industry, and the
composition of the industry with respect to the sports that are, and are not,
professionalized.
The same set of institutions would also produce an optimal range of quality of
sports entertainment.
Almost all commodities and services appear in markets over a range of qualities.
There are high- and low-quality residential units, automobiles, clothes, and educa-
tional and medical services. Commodities appear that are more and less durable,
more and less safe, faster and slower in their operation. Quality is costly to produce

in commodities; the higher the quality, the higher the prices at which they sell. Buy-
ers choose commodities on a continuum of quality, given the relative price, as their
tastes instruct them, subject to income constraints. Above and below the observed
qualitative range, commodities do not make themselves available. Firms learn that
it does not pay to offer automobiles that will last &dquo;forever&dquo; or automobiles that
require daily repair. The paired combinations of price and quality for both are such
as to attract an insufficient number of buyers to permit producers to recover their
costs. So the competition of sellers for customers and the competition of buyers for
goods cause the market to provide what the community wants (and is willing to pay
for) in the way of quality.
So with professional sports. High-quality entertainment, as in major league
games, or low-quality entertainment, as in junior high school games, can be
offered. Sets of games of given mean quality may have small or large variance in
quality; that is, skill and grace among players may be relatively equally, or rela-
tively unequally, distributed among teams. Knowledge about the range, mean, and
variance of quality of entertainment that the community desires the industry to pro-
duce can be known only by observing survival outcomes, if the industry is competi-
tively organized. Teams and leagues offering undesired products will discover that

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Rottenberg / RESOURCE ALLOCATION AND INCOME DISTRIBUTION 15

revenues do not cover costs and, over time, will dissolve; those offering desired
products will flourish.
Once the optimal scale of a subsector of professional sports is achieved in a com-
petitive framework, the optimal number of teams per league, as well as the optimal
number of leagues, is determined simultaneously.
The number of teams in a given league would be determined at least by the ful-
fillment of these conditions: (a) all teams in a league are of approximately equal
skill in play; (b) for seasons of given length and for given frequency of play, each
pair of teams in a league would play a sufficient number of times during a season so
that the influence of random error on the aggregate of game outcomes for that pair
would be kept within &dquo;tolerable&dquo; limits; and (c) the number of teams in a league is
not so large that consumers of the entertainment utility produced by the league can-
not keep the current rank ordering of teams handily in mind.
These conditions are likely to define a range of acceptable league sizes rather
than a single size point.
Optima with respect to the scale of the subsector and the scale of leagues define
the optimal number of leagues.
As has been mentioned previously in the discussion of other optima, there also is
no need here for explicit calculation.
The organization of a competitive framework for the sports industry would
cause the disciplining instruments of the market to bring about socially optimal out-

comes. The initiation of experimental ventures, some of which are successful and
others of which die on the vine, permits the market to function like a gigantic
implicit computer. The calculus for the definition of optima is carried out, but it is
done only implicitly.
Such a market would also tend to achieve a socially appropriate distribution of
teams in space. Teams in professional sports almost invariably carry the names of
places-usually cities or towns-and the schedules of games are composed in such
a way that one half of all games played by a given team during a season are played in

the place the name of which it carries. Buyers of the product of professional sports
who live in those places have cheaper transport costs, if they desire to attend a game,
than do those who live in other places.
Teams should be spatially distributed so that the excess of revenue over cost is
greater, with the indicated spatial distribution, than it would be with any other spa-
tial distribution. If mistakes have been made in the assignment of teams to places
and net revenue is not being maximized, the social purpose is served by rearranging
the distribution and reassigning some teams to other places. In this way, the utility
derived by consumers of the services of the sports industry is maximized, per unit of
cost. Cost includes, in this context, the value of time spent at games by those who
attend. Income that might have been earned and is forgone during the hours of
attendance is a measure of value of that time, but it can be assumed, as a first
approximation, that this cost is everywhere the same. The movement of teams from
their current places to new places redistributes wealth in society. Some lose, but

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16 JOURNAL OF SPORTS ECONOMICS / February 2000

others gain. If net revenue is larger in the new places, the sum of losses and gains is a
positive number; in the aggregate, people are better off for the moves.
Most sectors of the professional sports industry of the United States are not com-
petitively organized, and it is appropriate to examine what effects the departures
from competition have on the quantity and quality of entertainment that the indus-
try produces with the resources that it employs.
The most important constraint is on the competition of teams for players and of
players for employing teams. In some professional sports, a player is a free agent
until he signs his first contract with a professional team. Thereafter, the contracting
team owns the right to his services. In baseball, a reserve clause appearing in a uni-
form contract gives the team the right to renew the contract at its option. In football,
the player may make himself available to other teams upon notice of 1 year, but if he
contracts with another team, that team must pay the current holder of the right to his
services a price presumptively equal to the discounted value of that right. Thus, in
both situations, players are effectively foreclosed from changing their employers
within the relevant coalition of teams. In other professional sports, either replicas or
simulations of these constraining rules appear.
In some sports, even free agency in advance of first signing does not occur. A
register is composed of the names of university basketball and football players who
may be available for professional play. Teams are rank ordered inversely to their
standing in the most recently completed season. Choices are made by teams from
the register in that order. No team in the relevant coalition of teams may bid for the
services of a player chosen by another team.
Two nominal defenses for these constraints are often put forward. The first is
that they tend to ensure equality of allocation of talent and skill among teams in the
league and, therefore, tend to ensure uncertainty of game outcomes; thus, they
improve the quality of entertainment produced by play. The second defense is that
the constraints give teams an incentive to invest in the improvement of players,
since, as owners of the right to future playing services of those they have under con-
tract, they may subsequently recover their investment costs. Thus, it is said, if the
players are to become more skillful, if the quality of play in games is to improve,
and if consumers are to derive more entertainment utility from the observation of
games, teams must have an incentive to invest in player improvement. Neither
defense seems to be tenable.
Teams that own the long-term rights to players’ services because they have them
contracted or are exclusive bidders for those services, as when they have made draft
choices, may traffic in those rights. A right to services may be sold to another team
or bartered to another team for the right to the services of other players.
Given players are not of equal value to all teams. The gross value of a player to a
team is the increment of revenue he contributes to the team, in the sale of tickets for
attendance at games and in the sale of game broadcast rights, that would not be
earned by the team if some other player were employed in his stead. The net value of
a player to a team is the difference between his gross value to the team and what he

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Rottenberg / RESOURCE ALLOCATION AND INCOME DISTRIBUTION 17

costs the team. The cost of a player to a team is the sum of the price paid for the right
to his services, the training cost invested in him by the team, and the stream of sala-
ries paid to him for his services.
A pitcher is worth more to a baseball team weak in pitching and strong in batting
and fielding than he would be to a team strong in pitching and weak in the other
skills. A player of Italian descent might be worth more to a team playing half its
games in its home community if there is a large Italian ethnic component in that
community’s population rather than a small component. If there are, in some cities,
many good entertainment substitutes for professional team sports games, winning
will be important to teams in those cities to attract attendance, and highly talented
players who will much improve the teams’ prospects will be highly valued by those
teams.
If, onthe other hand, there are few good entertainment substitutes for games,
winning will be less important, since good attendance at games will occur, willy-
nilly, win or lose, and very talented players will be less valuable to teams located in
such cities.
If the buying and selling of rights to players’ services is permitted, as it is in pro-
fessional sports, which team, in the end, will acquire the services of given players?
A team will secure the right to the services of a player if the players’ services are
worth more to that team than to any other. If the team does not currently have that
right, because another team to which the player’s services are less valuable has him
under contract, the player’s contract will be purchased. If another team has the draft
choice right to an uncontracted player, the draft right will be purchased. When
transactions have played themselves out, players find themselves on the teams that
value them most highly and, thus, for which they are most productive.
But this is precisely the result that would be yielded by a competitive and uncon-
strained market. If there were no draft arrangement for uncontracted players, and if
bidding for them were open to all teams, players’ services would, as a first approxi-
mation, be bid for by teams for which they would be most productive in the genera-
tion of net revenue; this would offer the highest stipends. If there were no reserve
clauses and contracted players could freely recontract, and if bidding for the ser-
vices of those players were open to all teams, players would move from teams for
which they are less valuable to teams for which they are more valuable; this would
offer high stipends.
Upon analysis, it turns out that players would be allocated among teams in about
the same way, whether the labor market for players were freely competitive or, as
now, constrained by rules that diminish competition.
The constraints on competition in professional sports labor markets must, there-
fore, serve some other object-or, at the least, have some other consequence-than
the achievement of equality of allocation of talent among teams. They do, indeed,
have another consequence. Players are tied to teams that have draft rights to them or
have them under contract. If they desire to earn a livelihood in professional sports in
a particular league, one and only one bidder for the services of each of them is per-

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18 JOURNAL OF SPORTS ECONOMICS / February 2000

mitted to appear in the market. The result is that players can be expected to be paid
less than their value to their teams. They are exploited because they are confronted
by monopoly on the buying side of the market in which their services are bought
and sold.
The second defense for constraints in the market-that the ownership of long-
term rights to players’ services by teams is necessary if investment in the acquisi-
tion of playing skills is to occur-is also not viable upon analysis.
It is true that teams cannot be expected to incur investment costs that will yield
improved play over time unless the risk is small that they will be unable to recapture
those costs. It does not follow, however, that if teams do not invest in players, no one
will.
If there were free competition for players’ services, players would know that
their lifetime earnings from professional play would be a partial function of the
level of skill exhibited by them in play. They would have an incentive to invest in the
acquisition of skills because they would capture the yield on that investment. There
is no reason to suppose that players would be less responsive to given reward
arrangements than would teams. One would expect, in a competitive players’ labor
market, a network of schools, camps, coaching institutions, and firms offering tuto-
rial services where players, for a fee, could learn to improve their playing qualities.
In any case, in currently organized professional sports labor markets, profes-
sional teams do not invest in player skills in all sports. Basketball and football play-
ers are trained and brought to a professional level of skill by the universities at no
cost to the professional teams. In those sectors of the sports industry, the &dquo;invest-
ment defense&dquo; has not even nominal relevance.
It is sometimes said that a free labor market for players’ services would generate
frequent movement of players among teams. This, it is said, would diminish the
entertainment quality of play because consumers of the industry’s product form
empathetic psychic associations with players who are continuously attached to
given teams. Analysis of player mobility indicates, however, that the quantity of
movement of players per period should not be expected to be higher in free markets
than in constrained markets. In the one, they would move in response to differences
in stipends; in the other, they would move in response to differences between teams
in the values of the rents produced by their play that different teams can capture.
Differences in stipends are proxies for differences in the team-captured values or
rents. Directions and quantities of player movement between teams should be the
same in both cases.
If analysis did not lead to this result, teams would still be in a position of captur-
ing, in attendance and broadcast rights revenue, the value consumers put on long-
term attachment of players to given teams. They could sign players to long-term
contracts, with clauses assigning penalties to players who are in default of perfor-
mance. Risks now borne by players would then be assumed by teams. Players now
must insure themselves against loss of income when their playing careers are halted

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Rottenberg / RESOURCE ALLOCATION AND INCOME DISTRIBUTION 19

by broken bones; if they do not buy insurance policies to cover this event, they self-
insure. If contracts were drawn for long terms, teams would carry this insurance.
The transfer of risk (or, in the insurance case, the transfer of premium costs) would
be reflected in the contract terms. Players would receive a somewhat lower stipend;
it is a price they would pay for the diminished risk they confront.
Given the possibility of teams buying and selling the rights to players, the
reserve and modified reserve clauses in players’ contracts and the existence of

drafting rules for uncontracted players seem to have no expected effects on the allo-
cation of player resources among teams. They do, however, have income and
wealth distribution effects. Team owners are better off and players are worse off for
them.
Constraints on competition appear, also, in the product market of the sports
industry. Teams in a league have territorial rights. No other team of that league may
play in a place that has been assigned to a team without that team’s consent. Nor
may additional teams in currently unassigned places join a league without the con-
sent of some specified fraction (sometimes a majority, sometimes a fraction larger
than this) of the teams currently in the league. When a new team is admitted to a
league, in the United States, it must usually buy admission from teams currently in
the league.
The distribution effects of reserve clauses and drafting rules and the product
market monopolies implied by the rules of territorial rights and impeded entry of
new teams into established leagues can be and have been somewhat frustrated by

the organization of new leagues. New leagues offer alternative employment oppor-
tunities to players in old leagues and alternative consumption options to consumers
of sports entertainment. New leagues are, however, enormously more costly to
organize than new teams. The scale of the enterprise is larger by a factor of, say,
eight, but the degree of complexity in organizing a coalition of eight teams is so
much higher than it is for the organization of a team that costs of entry of a league
must be greater than the cost of entry of a team, if there were freedom of entry into
existing leagues, by a factor of much more than eight. The organization of the
industry in such a way that unconstrained entry into it can occur only by coalitions
of teams and not by individual teams means that product market monopoly can sur-
vive, even if only in modified form. The cost of entry of new leagues is made the
larger because successful entry requires that the leagues offer games of sufficiently
high quality to cross over the threshold of acceptability for buyers in the market for
television and radio broadcast rights. High-quality games imply the purchase of
high-quality resources, and high-quality resources are expensive.
The cost of entry of new leagues is additionally compounded by a defensive
strategy employed by existing leagues. Let a new league threaten to form, and exist-
ing leagues will admit additional teams to be located in currently unassigned
places; that is, existing leagues will &dquo;expand.&dquo; The consequences of expansion are
the assimilation of new teams into the system of a constrained labor market and

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20 JOURNAL OF SPORTS ECONOMICS / February 2000

diminished stipends of players from what they would be if new the league formed
and market competition prevailed. Another result is, of course, that prospective
investors in teams for new leagues are offered another option―entry into estab-
lished leagues-and this renders more difficult the organization of new leagues.
To the extent that high entry costs and the high risk of failure confronting new
entrants produce less than perfect competition in professional sports, it can be
expected that firms, in the sports industry, like maximizing noncompetitors in other
industries, will produce a smaller total output of entertainment than would occur
under competition, and it can be expected that the price for the entertainment ser-
vices they will produce will be higher than under competition.
Analysis indicates that public policy that would cause the professional sports
industry to approach competitive practice as closely as is feasible for that industry
would tend to bring about social optima with respect to the scale of the industry, the
scale of the industry’s subsectors, the allocation of the industry in space, and the
quality of the industry’s product. Such a public policy would also tend to bring an
end to the payment of stipends to players that are less than the value of the players’
contribution to the industry’s output.

Simon Rottenberg is a professor emeritus of economics, University .

of Massachusetts-Amherst

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