Four Final Four Thoughts

Posted on March 31, 2007 by

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Yesterday I was on Bloomberg Television, discussing the NCAA Final Four (and a bit of baseball) with Rhonda Shaffler. Let me expand briefly on what I said.

1. The Final Four is a Big Business for a Small Number of Schools

CBS pays the NCAA $6.2 billion – over 11 years – to broadcast the NCAA tournament. Each year that works out to more than $500 million in revenue. Part of this money – about $132 million – goes into a basketball fund that is distributed to conferences according to the success the conference teams have in the tournament. If your teams go far, you get more money. If your team or teams are eliminated in the first round, you get less. As a consequence of this distribution plan, the rich tend to get richer.

I think it’s important to note how the distribution of NCAA revenue conflicts with the primary purpose of the extensive (500 page) NCAA rule book. Throughout its history the NCAA has added rules in an effort to promote competitive balance. For example, colleges are prohibited from paying athletes because it’s feared that if athletes sold their services in a market, the richest schools would have the best players. And if that happened, the NCAA would not have competitive balance.

Of course, the NCAA as it stands today, does not have competitive balance. In January, the Social Science Quarterly published a paper by Jim Peach (“College Athletics, Universities, and the NCAA”). In this paper he states the following:

Competitive balance in men’s basketball will be measured here by appearances in the final four of the NCAA tournament since 1950. Only four teams (UCLA, North Carolina, Kansas and Duke) account for nearly a quarter (24.6 percent) of all final four appearances between 1950 and 2005. Thirteen teams accounted for half of all final four appearances. As with football, the concentration at the top in men’s basketball does not change much by decade.

Economic theory tells us that the labor market restrictions imposed by the NCAA are not likely to change the distribution of players or the level of competitive balance. Whether the players collect the money, or the money is collected by the schools, players are still going to migrate to wherever they generate the highest return. In other words, it’s not surprising that the same schools tend to win year after year.

This was true before CBS paid the NCAA billions to televise the tournament.  And it is still true today.

2. The Players Generate, but do not get, the Money

The prior discussion noted that college basketball players do not get paid. And I, like many other economists argue, that there is something wrong with an institution that takes money from athletes – many of which come from disadvantaged backgrounds – and gives it to coaches and universities.

Let me note a few sources where one can read more on this topic. Robert W. Brown – a professor of economics at California State University San Marcos – has published extensively on how much revenue a college athlete generates. With respect to men’s college basketball, Brown (along with Todd Jewell) found that in 1996 a player taken in the NBA draft generated more than $1 million per season for his college team. In other words, players like Greg Oden and Kevin Durant generate far more for their respective colleges than their athletic scholarship costs.

The discrepancy between pay and revenue generation results in a surplus, which appears to go to the coaches. This was a point made in the New York Times by Andrew Zimbalist (Looks Like a Business; Should Be Taxed Like One). Zimbalist, by the way, is the author of Unpaid Professionals, a very good book on college sports.

As I noted in the interview, the University of Alabama does not generate the revenues of the Miami Dolphins. Yet the Crimson Tide could offer Nick Saban a competitive wage. This is only possible because Alabama does not pay its players.

Brown and Zimbalist are not the only sports economists to comment on this issue. For more you can look in Economics of Sports (by Michael Leeds and Peter Von Allmen), Sports Economics (by Rod Fort), and Economics of College Sports (an edited volume by John Fizel and Rod Fort which has one article I authored). In addition, Randy Grant, John Leadley, and Zenon Zygmont have a forthcoming book entitled The NCAA and the Economics of Intercollegiate Sports (World Scientific). All of these authors explore in detail the labor market in college sports and conclude that players are indeed not being compensated for the revenue being generated.

3. The Final Four is Not an Engine of Economic Growth

Atlanta is hosting the Final Four. Cities campaign for the opportunity to host such an event. One might wonder, though, if this event impacts economic growth? Victor Matheson and Robert Baade investigated this question. Looking at data from 1970 to 1999, these authors found little evidence that economic growth was enhanced by a city hosting the Final Four.

Such a result is not surprising to those who have seen economists apply the methodology of public finance to the study of professional sports. Studies of the economic impact of stadiums and mega-events (such as Super Bowls), consistently find that sports do not generate substantial economic growth.

There are a few reasons for this result. Perhaps the biggest is the crowding out effect of sports consumption. Often sports consumption is simply replacing another potential item in a consumer’s entertainment budget. If the sporting event was not there, the consumer would simply enjoy some other form of entertainment. There is also the issue of leakages. For example, of a hotel raises its rates for a big event, these higher rates will often be transferred to a home office, not into the local economy.

All of this tells us that residents of Atlanta might enjoy the Final Four this weekend. But if the city spent tax dollars to host this event, it is not likely this investment will generate many returns.

4. And my picks….

Okay, I have problems with the structure of the NCAA. I think the player’s should be paid. And I do not believe cities should spend tax dollars to host the Final Four.

All that being said, I still intend to watch. Like a moth to the flame, I can’t stay away. So who will I root for?

I grew up in Michigan, but the Wolverines seem addicted to the NIT. I spent my teenage years in Nebraska, but the Cornhuskers were very bad this year. And the same could be said for my alma mater, Colorado State. Given that all my teams stopped playing some time ago, I need to find some reason to root for one of these teams.

My wife, thankfully, has provided a reason. Before the tournament began we each filled in our brackets. After the first four rounds, she has done slightly better than I. This is mostly because she tends to go with the seedings, only picking a few upsets here and there. I think I know something, so I pick more upsets.

Still, if UCLA can beat Florida, I will finish ahead of my wife. So on Saturday I will be rooting for the Bruins. And hopefully Ohio State – the team my wife and I both picked to win it all — will also make it to the Finals. If that happens, I can take some delight in having chosen the teams in the championship game.

All that being said, I do not think there is any criteria that would successfully predict the outcome of games where the competitors are so close in talent level. Each of the three remaining games should make for good television. It’s not good that the money this television audience will generate will go to rich schools (and not poor athletes). But the fact does not change the compelling nature of these games.

And now for some baseball…

I also talked a bit of baseball on Bloomberg. My story should be familiar to readers of The Wages of Wins. Money cannot buy championships in baseball. Again, payroll only explains about 18% of wins in baseball.

The Baseball Economist notes the reason why. I just received my autographed hard cover copy of this book (thanks, JC) and on page 194 it reads: “In the previous chapter we saw that a pitcher’s previous season performance explains only about 30 percent of his performance the following season. Similarly, in their book The Wages of Wins, economists David Berri, Martin Schmidt, and Stacey Brook report that a hitter’s previous season’s performance explains only about a third of his performance the following year.”

Both JC and The Wages of Wins authors find that baseball performance is difficult to predict. Consequently, it is difficult for baseball teams to know which players to spend their millions upon. When players do not perform as expected, teams with large payrolls do not get to win as much as they would like. Likewise, when players perform better than expected, teams like the Detroit Tigers (my team) get to go to the World Series. So although we might guess who we think is going to finish on top this season, as the season starts on Monday we don’t really know.

– DJ

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