In the July 25th edition of Sports Illustrated we saw the following statement (from a story about Derek Fisher and the NBA labor dispute):
The league contends that owners and players together will grow financially and thrive in competitive balance as long as the richest teams aren’t permitted to overspend and the smallest markets are assured of profitability.
This one sentence seems to suggest much that is inconsistent with the evidence. To see this, here is what I think we know about competitive balance in the NBA.
1. The NBA – relative to the other major North American sports – is relatively imbalanced. And this has been true throughout the tenure of David Stern.
Competitive Balance in the Stern Era.
Roger Noll and Gerald Scully developed a measure of competitive balance that involves calculating the ratio between the level of competitive balance we observe and the ideal level of balance (the calculation is detailed in many places, including The Wages of Wins). For the NBA, here is the average value for this ratio in the 27 years since Stern became commissioner (in 1984) and the 27 years before Stern took over the NBA (Editor’s Note: In a perfect world the measure would be 1.0).
- Competitive balance ratio in the NBA from1984-85 to 2010-11: 2.8
- Competitive balance ratio in the NBA from 1957-58 to 1983-84: 2.5
So the NBA, both before and after Stern, has consistently had a ratio in excess of 2.0. To put that in perspective, here is the same snap-shot for the NHL, NFL, and both leagues in baseball.
- NHL: 1.7 since 1984, 2.1 before 1984
- NFL: 1.5 both before and after 1984
- AL: 1.8 both before and after 1987
- NL: 1.7 since 1984 and 1.8 before 1984
As one can see, the other sports have generally had a ratio below 2.0. And that means – relative to other North American sports – the NBA is not very balanced.
One should note that historically baseball used to look like the NBA today. In the first half of the 20th century, the AL and NL both had an average ratio of around 2.4. How baseball improved – and how the NBA has not – is important to our explanation of what drives competitive balance. Before we get to that story, though, let’s talk about what doesn’t seem to drive balance in a sports league.
2. Salary caps, payroll caps, luxury taxes, and revenue sharing don’t seem to have much impact on competitive balance.
Capped at $5.5 Million and $22 Million and still can't compete.
David Stern and the NBA owners want to impose further limits on the spending of owners in the NBA. The NBA (in 1984) was the first to impose any kind of cap on team payroll. And in 1999 the NBA was the first leage to cap the salaries of individual players. As one can see, the 1984 cap didn’t alter competitive balance. And since 1999, the average ratio in the NBA has been 2.7. So the 1999 salary cap also didn’t seem to have much impact on balance.
This is not a surprising result. Martin Schmidt and I presented research this past summer that looked at the impact of various institutions (i.e. salary caps, luxury taxes, etc…) the NBA, NHL, NFL, and Major League Baseball have created to alter competitive balance. We found that none of these institutions had any statistically significant impact on balance in any of these leagues.
One should add that Martin and I are not the only researchers to look at how league institutions impact balance. Tony Krautmann and John Solow published research recently that indicated that increased revenue sharing in baseball also failed to impact competitive balance. Krautmann and Solow, though, did find that revenue sharing reduces the wages paid to players.
So the institutions that leagues use reduce wages but don’t seem to change competitive balance. Before moving on, let’s briefly note what seems to drive balance in a league. As we have shown in past research (and as discussed in The Wages of Wins), competitive balance in a league are primarily about changes in the population leagues draw upon for talent. For example, racial integration had a positive impact on competitive balance in baseball. And an influx of foreign talent in hockey (as Marty and I noted in our research this summer) led to more balance in the NHL.
Although the NBA also draws upon foreign talent, the impact on balance isn’t seen because the population basketball teams draw upon – even when we consider the entire world – is still quite small. Specifically, NBA teams require really tall athletes. And since tall athletes are in short supply, the NBA persistently has a problem with balance. In other words, the supply of dominant players – like LeBron James and Dwight Howard – is quite small. Some teams get these amazing players. And others have to employ players like Andrea Bargnani and Travis Outlaw.
3. There is no relationship between market size and team wins.
9.6 Million fans vs. 1.6 Million fans. Both win titles. . . .
The NBA has one team located in Salt Lake City (1.1 million people in metropolitan area) and one team located in Chicago (9.6 million people in metropolitan area). Such disparities in market size leads people to suspect that teams located in smaller markets are at a competitive disadvantage. But when we look at the average number of wins from 1999-00 to 2010-11 and the population in each metropolitan area, we fail to find a statistically significant link. In sum, market size and on-court success are not related.
One can also look at payroll and wins across this same time period. We do find a statistically significant link between team spending and wins. But team payroll only explains 6% of the variation in team wins. In other words, teams are not able to effectively buy wins in the NBA.
4. Fans don’t seem to care much about competitive balance.
Like it or not people tuned in to watch.
But what if the richest teams could actually buy wins effectively? Wouldn’t that cause a problem for the league?
Researchers have looked at the link between competitive balance and league attendance in baseball. As noted in The Wages of Wins, the link is quite small. Two different studies found that in baseball, a movement from the most competitive position in league history to the least competitive position in league history would only result in about a 15% increase in attendance. Yes, that is something. But that is all you get from a move from the least balanced position to the most balance.
Recently I have looked at this same issue in the NBA. And the preliminary results seem quite similar. NBA fans don’t seem to care much about competitive balance. To illustrate, the NBA was much more balanced in the late 1970s, but it was not very popular. As noted, since Stern took over the NBA has not been balanced at all. And yet per game attendance has risen from about 11,000 in 1983-84 to more than 17,000 this past season. Furthermore, the league’s television contract has risen from less than $40 million per year (for the entire league) in 1984 to more than $900 million per year today.
Despite all this evidence, though, owners are still demanding salary concessions in the name of competitive balance. And as noted in the past, owners of professional sports teams have made this argument since the 1870s. So it is not surprising to see this story being told. But one hopes is understood – at least someday – is that the owner’s argument is not supported by the empirical evidence.
Let me close with an unrelated note from the aforementioned Sports Illustrated article. The following paragraph from the article clearly has a Wages of Wins theme:
The owners maintain that a hard ceiling on team salaries is crucial, citing the failure of even the luxury tax to curb teams’ overspending. Fisher says that a hard cap would encourage each team to budget the majority of its payroll for two or three stars, leaving other players to not only compete for the remaining money but also to do so largely on nonguaranteed contracts. “What we envision is a cannibalist-type system, where you would constantly be in competition with your teammates over shots and points and minutes,” says Fisher. “We’ve had a problem over the years convincing fans that guys really do care about playing as a team and wanting to make a sacrifice to win a championship and not just thinking about themselves.”
The Wages of Wins argued that salary in the NBA was primarily driven by scoring. And this argument was echoed in Stumbling on Wins. Here we have a quote from Derek Fisher confirming this notion. Yes, the players know what gets them paid. And that means players are not just competing to win games, they are also competing with each other for shot attempts and ultimately salaries. This feature of the labor market, though, isn’t about the league’s collective bargaining agreement. It is really all about the NBA’s confusion about what drives wins.
Of course – like the competitive balance story above – the link between scoring and pay has been discussed before. And like the competitive balance story above, one should expect that the link between scoring and pay will be discussed again.
– DJ
Wages of Wins Journal 
fricktho
August 10, 2011
This entire CBA feud blows my mind when it comes to the NBA. There are so many issues, and not nearly enough of them are being addressed, or will be addressed when it’s over. The same problems will remain even if the owners get their way. The league is delaying the inevitable, but actually this may be exactly what they want. The same issues will remain so the next time the CBA expires the league can again blame player salaries as a root cause and ignore the giant elephant in the room, kind of like the real world.
Chris Wong
August 10, 2011
Question – and I’ll preface it this by saying my understanding of the competitive balance measure isn’t great – I understand that the competitive balance measure is determined by the standard deviation of win pct. So as long as the spread of wins pct remains near .500, the competitive balance will be measured as “good”. I don’t think this takes into account specific teams. For example, suppose in baseball no team wins more than 95 games and no team loses more than 67 games this season. I think this would have a “good” competitive balance score. But suppose these exact standings occur for the next 10 years. Each year would have a “good” score, but the same teams would be in first place and last place each year. Is my understanding of the metric correct? Wouldn’t you have to normalize it by looking at the cumulative record of each team over the timespan?
A.K.S.
August 10, 2011
I find this discussion to be beside the point, just as I found the similar discussion in Wages of Wins to be beside the point. “Competitive balance” isn’t the issue. Fairness is.
As an immediate matter, who cares what rhetoric the league uses in its labor negotiations. Should anybody be influenced by the league saying it wants X or Y in the new CBA for competitive balance reasons? Of course not. It is pure PR; no substantive weight should be placed on it.
Secondly, the lede is completely buried in this post. Somewhere in the middle of the post, Prof. Berri writes that “team payroll only explains 6% of the variation in team wins”. Only? ONLY??? That’s insane. That’s on average 2.5 wins per season (.06 * 41), merely for having a rich (and/or spendthrift) owner. That’s a grossly unfair situation. I mean, all other things being equal, teams with good owners should win about 43.5 games/season, while teams with bad owners should win about 38.5 games per season. That’s awful.
Let’s put it another way. Let’s say that somehow the new CBA competely eliminates the ability of owners to compete for players based on spending. That is, team payroll would account for 0% of the variation in team wins. BUT, let’s say that owners could pay money to change the distance of the 3-point line for their teams, so that, say, by paying $X million to the league they could move the line (for their team only) from 23’9″ to 21′. And, by doing so, they could gain a 6% advantage in wins. Would anyone consider THAT fair? Of course not. But yet people are A-OK with owners spending money unfairly to gain a 6% advantage. It’s crazy.
Alex
August 10, 2011
A.K.S. – that’s not what 6% of the variation means at all. It means that in a range from explaining nothing (0%) about why teams win different amounts of games to explaining everything (100%), payroll explains virtually nothing. https://sportskeptic.wordpress.com/2011/01/06/we-got-a-twofer/
brgulker
August 10, 2011
This is a silly argument. All owners play by the same rules. Some owners are cheap bastards. Some owners will spend whatever it takes to win.
From the perspective of the owners, the past CBA is entirely fair, because it applies equitably to everyone.
From a fan’s perspective, maybe you could argue it’s not fair, but who cares about the fans? Certainly not the NBA, the owners, or the players. If you’re a fan of a team owned by a cheap bastard, sure, that’s “unfair” relative to your friends who are Lakers fans. As fans, they’ve got the upper hand on you.
But you can’t seriously expect the NBA, owners, or players to be responsible for fixing that type of unfairness, can you?
A.K.S.
August 10, 2011
brgulker – I am only coming at this from a fan’s perspective. I couldn’t care less whether the owners or the players win the CBA negotiations. And, yes, I do expect the owners and the players to be responsible for making the game fair to me. Why wouldn’t they care what the fans think? The fans pay the bills.
Alex – Of course other things than spending matter more in determining wins. But explaining 6% of wins is a lot, not “virtually nothing”. Spending should explain 0% of wins, or as close as possible to 0%. 6% is entirely too much.
cjuice28
August 10, 2011
In regards to point #4:
I really think you should avoid looking at the 1980s and further back for purposes of fan response (attendance). Big time sports are at a different place culturally now than in the past, and I think that is represented well by franchise valuations’ massive increases, as well as overall revenue.
I would also submit, that while a peak to trough difference of 15% may seem small. You have to remember attendance is a rather crude measure for this purpose. Teams obviously price or try to price tickets to maximize revenue, which often results in cutting ticket prices in response to lower demand (presumably because of less competitive team). So, actually in such a context seeing a 5 or 10% movement is actually quite telling.
In regards to point #3:
Something for further analysis: It seems inconsistent that market size and wins do not correlate, given that payroll and wins do at 6%. You would expect that since, market size and payroll are usually related, you would then see some co-correlation here.
General thoughts:
Trying to say that competitive balance should be throw out or marginalized is a point of view that is actually bad for the players. How so? Well, flat out the NBA (teams) is losing money. I don’t think you’re going to get the owners to increase their offer, without involving revenue sharing. There is simply to big of a gap for small market teams that are poorly or marginally run, to make anything or at least not lose $10-$15 M/yr.
And I realize that revenue sharing does not necessarily equal competitive balance. Other measures can be used. But at the end of the day, I think it is the #1 item that impacts competitive balance.
One last thought. I have consistently seen that the luxury tax in the NBA (not the salary cap) has limited teams from spending more. Teams consistently will spend up to that line. Teams, also, will very often make non-basketball trades to get under the tax. I see the luxury tax as a very important tool that should be kept in place, unless other more advanced measures are incorporated.
Bob Koca
August 10, 2011
There is seemingly a value judgement made when an “ideal” level of competitive balance is discussed and the editor notes that in a “perfect” world the ratio would be one. But in point
four of this article it is pointed out that fans don’t seem to care about the ratio.
fricktho
August 10, 2011
How would it be possible for spending to explain 0% of wins? It’s pretty hard to fill an NBA roster without paying anyone, and it’s even harder to fill it with good players without doing so. Two things I know about the NBA, or any sport for that matter: 1. You need good players to win games. 2. Good players cost more money.
Even if there were a hard cap you’d have teams spending under the cap. Teams spending under the cap would be more likely to not have a star player. If they did it would be in their best interest to try to surround that player with other good players, which costs money, which would mean they wouldn’t be able to remain significantly below the cap.
classhandicapper (@Classhndicapper)
August 11, 2011
The bottom line is the bottom line.
If some cities/ franchises aren’t profitable, or less understood, “aren’t profitable enough to justify their existence given the capital allocated” they should NOT exist. IMO, the idea should be to NOT interfere in the natural order of things with caps, luxury taxes, revenue sharing, and other rules.
Obviously the NBA, the players, and the owners are not going to be in favor of a very significant contraction, but that’s what the league probably needs. The talent would be concentrated on fewer teams (less of a shortage of dominant players), each would have the financial resource to compete for players instead of some looking to dump good players for scrubs just to save a few dollars, the players would be compensated better, and balance would improve.
Brian Tung
August 11, 2011
A.K.S.: I think there’s still some confusion about what the 6 percent means here. Let’s consider an example. Suppose that Team A wins 50 games, and Team B wins 40 games–a difference of 10 games. Very roughly, what that 6 percent means is that of those 10 games, only 0.6 is typically explained by their difference in payroll. The rest of it is other factors: I imagine things like man-hours spent injured, back-to-backs and four-in-fives, stuff like that. In other words, if you could somehow regress to account for everything except for payroll, the adjusted wins for the two teams would be nearly identical.
Now, that’s not exactly what that means, but I think it’s close enough to indicate that it’s a fairly small factor. By way of comparison, the standard deviation on the number of wins on a “truly” .500 team is about 4.5–seven times greater. That’s a pretty low signal-to-noise ratio.
Brian Tung
August 11, 2011
Having said that, it could be that payroll is important in some ways, but that impact is lost when doing an overall regression. The conventional wisdom is that it’s a superstar’s league. Let’s suppose that’s true. A large bank account gives one a way to bid competitively for the few superstars that are out there (say that there’s five in the league at any time). The teams that get them will likely have larger than average payrolls and a greater than average number of wins, but that impact is lost among the larger number of teams that instead pay out for two or three stars that are expensive but don’t contribute nearly as much to wins. (I seem to recall reading that superstars are relatively underpaid, while stars are relatively overpaid.)
Michael Procton (@MichaelProcton)
November 22, 2011
Fricktho, you’re wrong. In both American hard-capped leagues, there is a salary floor to go along with the ceiling. In the NBA, it was proposed that that number be upwards of 90% of the cap maximum.