Alex Rodriguez is Underpaid

Posted on October 13, 2006 by

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Last Sunday this statement appeared in an article by Patrick Dorsey in the South Florida Sun-Sentinel. The article, entitled “Determining the worth of an athlete involves many factors”, reviewed the work of several economists who have examined the value of athletes in baseball, basketball, football, and hockey.

The analysis of Alex Rodriguez was offered by Stephen Walters, an economist at Loyola (Md.) College. Walters, along with John Burger – a fellow economist at Loyola – have published and presented research examining the determinants of revenue in baseball and the economic value of a baseball player. Their work follows in the footsteps, and substantially builds upon, the research of Gerald Scully. Scully, for those unfamiliar with the history of thought in sports economics (and that would be everyone outside our little field), virtually began the empirical examination of sports by economists in the 1970s.

Given the research of Walters and Burger (or is it Burger and Walters?), Walters is not exactly just talking off the top of his head when he offers the following comment on A-Rod’s economic value: “A-Rod is certainly generating more than $25 million in annual revenues to the Yankees.”

Although the A-Rod quote draws you into this article, the actual story is what factors cause a player to be overpaid or underpaid. Before we get to a couple of items on the list, let me very briefly review how economists define overpaid and underpaid. A worker is overpaid when her/his wage exceeds the revenue the worker generates for their employer. A worker is underpaid when wages are less than the revenue generated.

One should note that this has nothing to do with what people believe a worker “should” be paid. In other words, economists are not asking – as the article notes – whether a school teacher should be paid more than a baseball player. All we are asking is if the revenue the athlete generates justifies the wage paid.

Given these definitions, we can expect inexperienced players whose salaries are limited by league rules to tend to be underpaid. For example, when a player is chosen in the first round of the NBA draft his salary is determined by where he was taken. These salary slots are typically well below market value – especially for players like LeBron James and Dwyane Wade who led their respective teams in Wins Produced.

In contrast, veteran players like Allan Houston – who receive guaranteed contracts and then suffer injuries – tend to be overpaid. Although not mentioned in the article, I would add that even if Houston had stayed healthy he would still have been overpaid. For his career he only generated 21 wins and he was never an above average performer.

Beyond noting the conditions that cause a player to be overpaid and underpaid, the article also notes the value of star power. Specifically, as we note in The Wages of Wins, Allen Iverson’s star power matters to every team but the one that pays his salary. This is because when a team travels its stars can indeed attract additional fans. At home, though, its wins that matter, not star power. This is why the Philadelphia 76ers ranked towards the top in road attendance, but towards the bottom in attendance at home. The 76ers failure to win consistently caused many of Philadelphia’s fans to stay at their own home, or at least find something else to do in Philadelphia.

If wins are what draws the fans, it is important to note that the attraction does depend upon the market where the team plays. This is one of the key results noted in the work of Walters and Burger (and also Berri, Schmidt, and Brook). As Walters notes, A-Rod was probably not worth $25 million per year in Texas. But in the Big Apple, A-Rod’s productivity can generate more than $25 million in revenue. And that is true, even if he failed to produce in four playoff games this year.

– DJ

Posted in: Sports Econ