The absolute level of quality simply refers to the level of quality, for example, the difference between minor and major leagues. The relative level of quality describes the competitiveness of a team once the absolute level is determined.
Uncertainty of outcome hypothesis:
fans want their teams to win in close games, and when it comes to postseason, fans expect a reasonable chance that their team will appear, not every year, but often.
The more fans in a given location are willing to pay for quality, the higher the quality of the team they will get to enjoy. Demand shifters: preferences; fan income; the price of other goods; expectation, population
Quality is one of the more important preference elements in the determination of demand.
Nearly all of the money in sports comes from fans.
In sports, market power is derived from the fact that teams occupy exclusive geographic territory.
9/30/2012
9/28/2012
China at the death of Mao
China's post-Mao transition to a market economy is particularly intriguing given that the post-Mao reform was by no means the first time China had tries to restructure its socialist economy.
It was the Long March that began to remake the Chinese Communist Party as a native Chinese party and forged its independence from Moscow.
A striking and ironic feature of socialism is its inherent anti-population. Unlike the democracy, which is forced to be responsive to the average voter, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner.
Although Mao crushed the market in ideas and monopolized the realm of thought, he was never a support of centralization in administration. As an unintended consequence of decentralization, Mao could reach provincial government directly, without going through the bureaucracy of various ministries in Beijing. With Mao calling for speedy economic development, local authorities were now well positioned to begin the Great Leap Forward.
Under the commune system, all assets were taken away from households and managed as collective goods. A glittering and disastrous invention that swept rural China in 1958 was the commune canteen.
Administrative decentralization was unfortunate (decentralization without protection of checks and balance is more disastrous) and pushed the Chinese economy back to the central planning.
Some structural flaws in the administrative decentralization of 1958:
(1) anti-market mentality
(2) strict control of domestic migration
(3) state monopoly of media
(4) radical anti-intellectualism
A market economy assumes two deep epistemic commitments: acknowledgement of ignorance and tolerance of uncertainty.
Unlike the Great Leap Forward when the political elites were largely sheltered from the disaster, the Party veterans were squarely at the center of the political struggle during the Cultural Revolution.
It was the Long March that began to remake the Chinese Communist Party as a native Chinese party and forged its independence from Moscow.
A striking and ironic feature of socialism is its inherent anti-population. Unlike the democracy, which is forced to be responsive to the average voter, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner.
Although Mao crushed the market in ideas and monopolized the realm of thought, he was never a support of centralization in administration. As an unintended consequence of decentralization, Mao could reach provincial government directly, without going through the bureaucracy of various ministries in Beijing. With Mao calling for speedy economic development, local authorities were now well positioned to begin the Great Leap Forward.
Under the commune system, all assets were taken away from households and managed as collective goods. A glittering and disastrous invention that swept rural China in 1958 was the commune canteen.
Administrative decentralization was unfortunate (decentralization without protection of checks and balance is more disastrous) and pushed the Chinese economy back to the central planning.
Some structural flaws in the administrative decentralization of 1958:
(1) anti-market mentality
(2) strict control of domestic migration
(3) state monopoly of media
(4) radical anti-intellectualism
A market economy assumes two deep epistemic commitments: acknowledgement of ignorance and tolerance of uncertainty.
Unlike the Great Leap Forward when the political elites were largely sheltered from the disaster, the Party veterans were squarely at the center of the political struggle during the Cultural Revolution.
9/27/2012
The business of sports
Sports are business. Reasons: (1) owners manage the teams based on profit maximization (2) Owners would rather pressure state and local governments to root the bill of stadiums. If sports are not business, wealthy owners could just give the players what they wanted, let fans into stadiums for free, and every one would be happy. Part of the return may be in terms of his love of sports, but there is an undeniable business aspect to the investment as well.
Although overpayment may be in the eye if the beholder, there is no doubt that athletes make a lot of money. Team revenues continue to grow, providing the basis for such demands in the first place.
Two hypotheses that have been important and fundamental to research in the area:
(1) competitive balance:
fans prefer their team to win but they also prefer close game outcomes and season finishes to blowouts.
(2) invariance principle:
player drafts and "the player reserve system" then in place did nothing to competitive balance. Instead, these mechanisms simply redistributed the value of talent away from players and toward owners.
Although overpayment may be in the eye if the beholder, there is no doubt that athletes make a lot of money. Team revenues continue to grow, providing the basis for such demands in the first place.
Two hypotheses that have been important and fundamental to research in the area:
(1) competitive balance:
fans prefer their team to win but they also prefer close game outcomes and season finishes to blowouts.
(2) invariance principle:
player drafts and "the player reserve system" then in place did nothing to competitive balance. Instead, these mechanisms simply redistributed the value of talent away from players and toward owners.
Labor relations in pro sports
Players don't want real economic competition any more than owners do. For example, unions have never supported completely unrestricted free agency.
Collective bargaining means that players are allowed to act as unit and owners are obliged by law to recognize that right.
The National Labor Relation Act guarantees three essential rights for labor:
(1) The right of labor to organize and form unions
(2) The right of labor to bargain collectively through representatives of their own choosing
(3) The right of labor to use pressure tactics such as strikes and picketing
Appeals of unfair labor practices go to the National Labor Relations Board for a ruling. Bargaining in good faith means that opponents must be striving to reach an agreement rather than striving to drive a wedge in negotiations.
The essence of collective bargaining is that both owners and players have relinquished some of their individual bargaining rights to their representatives, leagues, and unions.
In a nutshell, the goal of unionization is to offset owner power over MRP in order to drive payment closer to the level that would be determined under a competitive situation.
Salary exploitation= (MRP-Salary)/MRP
Obstacles to Organization
Although some players may immediately recognize the value of organization, not all will. Therefore, the potential union incurs start-up education costs.
Free-riding, owner retaliation, political sentiment and illegal league behavior
The logic of collective action:
(1) rational ignorance: on any given policy issue, details are left to team representatives and leadership. As a result, any given player knows nearly nothing about almost everything that the union does. Rational ignorance is fueled by the fact that it is difficult for any individual players to tell how any given choice will affect them. It is also expensive to discover any particular representative's role in any given policy. Thus it is rational for players to be ignorant about union policy because it is expensive to be informed.
The players who are not rationally ignorant are those who stand to gain or lose the most from union choices and have lower participation costs--a characterization of established veteran stars.
Union leadership will produce concentrated benefits (concentrated in the sense that they are large relative to the small group of star players who receive them) and dispersed costs (dispersed over the majority of nonstar players in the league)
powerful players control the fate of union officials
Collective bargaining means that players are allowed to act as unit and owners are obliged by law to recognize that right.
The National Labor Relation Act guarantees three essential rights for labor:
(1) The right of labor to organize and form unions
(2) The right of labor to bargain collectively through representatives of their own choosing
(3) The right of labor to use pressure tactics such as strikes and picketing
Appeals of unfair labor practices go to the National Labor Relations Board for a ruling. Bargaining in good faith means that opponents must be striving to reach an agreement rather than striving to drive a wedge in negotiations.
The essence of collective bargaining is that both owners and players have relinquished some of their individual bargaining rights to their representatives, leagues, and unions.
In a nutshell, the goal of unionization is to offset owner power over MRP in order to drive payment closer to the level that would be determined under a competitive situation.
Salary exploitation= (MRP-Salary)/MRP
Obstacles to Organization
Although some players may immediately recognize the value of organization, not all will. Therefore, the potential union incurs start-up education costs.
Free-riding, owner retaliation, political sentiment and illegal league behavior
The logic of collective action:
(1) rational ignorance: on any given policy issue, details are left to team representatives and leadership. As a result, any given player knows nearly nothing about almost everything that the union does. Rational ignorance is fueled by the fact that it is difficult for any individual players to tell how any given choice will affect them. It is also expensive to discover any particular representative's role in any given policy. Thus it is rational for players to be ignorant about union policy because it is expensive to be informed.
The players who are not rationally ignorant are those who stand to gain or lose the most from union choices and have lower participation costs--a characterization of established veteran stars.
Union leadership will produce concentrated benefits (concentrated in the sense that they are large relative to the small group of star players who receive them) and dispersed costs (dispersed over the majority of nonstar players in the league)
powerful players control the fate of union officials
9/25/2012
Microfinance
Micro-lenders are not established merely through the need of poor people,
but by the decision-making of donors who first identify a social or
developmental objective.
Some lenders specifically target microcredit at women. Women are usually seen as economically less independent than men in the same social group, and benefits from their economic empowerment are argued to extend more directly to their children. Therefore, women are often seen as more desirable lenders, from a social equity point of view, than men, and there is a large number of microlenders who explicitly aim at women empowerment.
Another important group is young people. Alternative target groups may comprise rural people, because they are seen as unable to benefit from development and employment creation in cities and towns. Finally, other social criteria for selecting a target group may be factors such as ethnicity or nationality, or factors of social disadvantage like a physical disability.
Targeting specific sections of the population has not only social but also economic implications. There are two sides to it: first, different groups may be variably efficient in utilising micro-loans in creating viable enterprises, and second, different groups typically have different repayment patterns, thus impacting on the sustainability of microlenders.
A clear distinction between various groups of microlenders: those who provide a business service in an infant industry situation, and thus focus on economic viability, and those who see themselves as a comprehensive development and empowerment agency, and thus emphasise social change. With appropriate arguments, both approaches can be justified. However, many donors and microlenders hold on to unreasonably optimistic hopes of being able to combine the best of business mindedness and charity and compassion. Therefore, donors as well as lenders evade some hard choices; this may explain why many microcredit schemes promise to deliver on conflicting objectives.
Some lenders specifically target microcredit at women. Women are usually seen as economically less independent than men in the same social group, and benefits from their economic empowerment are argued to extend more directly to their children. Therefore, women are often seen as more desirable lenders, from a social equity point of view, than men, and there is a large number of microlenders who explicitly aim at women empowerment.
Another important group is young people. Alternative target groups may comprise rural people, because they are seen as unable to benefit from development and employment creation in cities and towns. Finally, other social criteria for selecting a target group may be factors such as ethnicity or nationality, or factors of social disadvantage like a physical disability.
Targeting specific sections of the population has not only social but also economic implications. There are two sides to it: first, different groups may be variably efficient in utilising micro-loans in creating viable enterprises, and second, different groups typically have different repayment patterns, thus impacting on the sustainability of microlenders.
A clear distinction between various groups of microlenders: those who provide a business service in an infant industry situation, and thus focus on economic viability, and those who see themselves as a comprehensive development and empowerment agency, and thus emphasise social change. With appropriate arguments, both approaches can be justified. However, many donors and microlenders hold on to unreasonably optimistic hopes of being able to combine the best of business mindedness and charity and compassion. Therefore, donors as well as lenders evade some hard choices; this may explain why many microcredit schemes promise to deliver on conflicting objectives.
Racial discrimination in basketball players' compensation
Since basketball players are more highly visible (both on the court and on the bench) to fans than players in other sports, customer discrimination may well be more prevalent in basketball than elsewhere, especially in view of the relative scarcity of white player.
In customer discrimination, the consumer is willing to pay a premium for white workers. Although blacks have made major gains in professional basketball, unexplained racial salary differentials are of a similar order of magnitude as for the rest of the economy.
All else equal, white representation on a team contributes to home attendance, providing evidence consistent with the idea of customer discrimination. On the other hand, we do not find evidence of discrimination in the draft selection process.
By greatly reducing employer monopsony power, the free-agency system appears to have led to a rapid escalation of salaries.
A variety of specifications and statistical techniques indicate that, ceteris paribus, black NBA players earn significantly less than white players by about 20%. In addition, ceteris paribus, home attendance is a positive func- tion of white representation on the team. Such findings are consistent with the notion of customer discrimination. On the other hand, our results for draft position do not indicate discrimination in hiring.
Our results suggest that customer (fan) discrimination may be the ultimate cause of the black shortfall. As long as fans prefer to see white players, profit-oriented teams will make discriminatory salary offers.
In customer discrimination, the consumer is willing to pay a premium for white workers. Although blacks have made major gains in professional basketball, unexplained racial salary differentials are of a similar order of magnitude as for the rest of the economy.
All else equal, white representation on a team contributes to home attendance, providing evidence consistent with the idea of customer discrimination. On the other hand, we do not find evidence of discrimination in the draft selection process.
By greatly reducing employer monopsony power, the free-agency system appears to have led to a rapid escalation of salaries.
A variety of specifications and statistical techniques indicate that, ceteris paribus, black NBA players earn significantly less than white players by about 20%. In addition, ceteris paribus, home attendance is a positive func- tion of white representation on the team. Such findings are consistent with the notion of customer discrimination. On the other hand, our results for draft position do not indicate discrimination in hiring.
Our results suggest that customer (fan) discrimination may be the ultimate cause of the black shortfall. As long as fans prefer to see white players, profit-oriented teams will make discriminatory salary offers.
The myth of golden age of player loyalty
There is a trade-off between a stable roster that fans like and eventual declines in winning percents that fans won't stand for. All this really means is that there is a profit-maximizing level of roster stability.
Has the duration of roster stability changed since free agency? NO
Reasons:
(1) players move at about the same rate with just a slight increase in the quality of players who do move.
(2) prior to free agency, the period fans ironically refer to as the golden age of roster stability, there was no such thing as player loyalty because it was impossible for players to exercise loyalty at all. Even with the introduction of free agency, many free agents are involuntary because the original teams don't want them.
So it is only the very few superstar free agents who have any chance to exhibit what fans think of as loyalty to their team.
Has the duration of roster stability changed since free agency? NO
Reasons:
(1) players move at about the same rate with just a slight increase in the quality of players who do move.
(2) prior to free agency, the period fans ironically refer to as the golden age of roster stability, there was no such thing as player loyalty because it was impossible for players to exercise loyalty at all. Even with the introduction of free agency, many free agents are involuntary because the original teams don't want them.
So it is only the very few superstar free agents who have any chance to exhibit what fans think of as loyalty to their team.
The history of player pay
Pro owners would certainly pay less if they could and pocket the extra revenue. This would require making the market for player services less competitive. \
The first step to reducing pay involves the entry of new talent into the pro ranks. The reverse-order-of-finish draft was established. (The draft used by NBA)
The impact of draft: part of the value of talent that would have gone to recruiting and signing compensation is preserved for the league.
(All competition over incoming talent is eliminated since incoming players have no choice in signing their first contract)
But the amount preserved for the league seems to be diminishing:
(1) training has become a year-round activity
(2) most of the incoming athletes are simply worth too much to let their services slide for a year
The value that is preserved for the league goes to the owners of the weakest teams in the league.
Typically, weak teams are weak because that is the best that their fans will support (Rottenberg's invariance principle)
The draft reduces competition over players as they enter the league. The second step to reducing pay is the reduction of competition over talent after it has been drafted.
1922, the Federal Baseball decision simply meant that it would be nearly impossible to challenge the reserve clause because the Supreme Court had failed to rule against it.
Free agency actually is limited free agency in all pro sports.
One measure of the amount of player MRP that was kept by owners when the reserve clause was in force is called player exploitation.
formula: (MRP-Actual Salary)/MRP
With dramatic escalation in salaries brought by free agency, risk drove owners and players to long-term contracts.
Shirking actually is an old economic issue falling under the heading of principal-agent problems.
The economic remedies:
(1)monitoring effect
(2)strategic player effect (合同年效应) incentive-compatible mechanisms like performance incentives and contingency payments.
Invariance principle: the distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players' MRPs.
But restrictions on competition do reallocate payments away from players toward smaller-revenue market owners.
The invariance principle predicts that the better players will move to better teams, even if a draft is installed. Larger-revenue market owners will compensate smaller-revenue market owners for talent rather than find the talent on their own. If there were no draft, the players would get the money because they would simply go directly to the teams in higher-revenue markets and collect the returns in terms of higher staring salaries and signing bonuses.
Trading down draft picks: a team actually trades higher draft picks for lower draft picks. Reason: an owner may not be able to afford to pay signing bonuses.
The first step to reducing pay involves the entry of new talent into the pro ranks. The reverse-order-of-finish draft was established. (The draft used by NBA)
The impact of draft: part of the value of talent that would have gone to recruiting and signing compensation is preserved for the league.
(All competition over incoming talent is eliminated since incoming players have no choice in signing their first contract)
But the amount preserved for the league seems to be diminishing:
(1) training has become a year-round activity
(2) most of the incoming athletes are simply worth too much to let their services slide for a year
The value that is preserved for the league goes to the owners of the weakest teams in the league.
Typically, weak teams are weak because that is the best that their fans will support (Rottenberg's invariance principle)
The draft reduces competition over players as they enter the league. The second step to reducing pay is the reduction of competition over talent after it has been drafted.
1922, the Federal Baseball decision simply meant that it would be nearly impossible to challenge the reserve clause because the Supreme Court had failed to rule against it.
Free agency actually is limited free agency in all pro sports.
One measure of the amount of player MRP that was kept by owners when the reserve clause was in force is called player exploitation.
formula: (MRP-Actual Salary)/MRP
With dramatic escalation in salaries brought by free agency, risk drove owners and players to long-term contracts.
Shirking actually is an old economic issue falling under the heading of principal-agent problems.
The economic remedies:
(1)monitoring effect
(2)strategic player effect (合同年效应) incentive-compatible mechanisms like performance incentives and contingency payments.
Invariance principle: the distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players' MRPs.
But restrictions on competition do reallocate payments away from players toward smaller-revenue market owners.
The invariance principle predicts that the better players will move to better teams, even if a draft is installed. Larger-revenue market owners will compensate smaller-revenue market owners for talent rather than find the talent on their own. If there were no draft, the players would get the money because they would simply go directly to the teams in higher-revenue markets and collect the returns in terms of higher staring salaries and signing bonuses.
Trading down draft picks: a team actually trades higher draft picks for lower draft picks. Reason: an owner may not be able to afford to pay signing bonuses.
9/24/2012
The value of sports talent
On top of salaries, many players earn substantial endorsement income.
How can athletes be worth so much?
Marginal revenue product: MRP(W)=MP(W)*MR(W)
MP(W) is marginal product, or the player's contribution to winning percent. IN sports, where market power leads to downward sloping demand functions, MR decreases with output. MRP is the input's contribution to the revenues earned by the team owner.
Experience-earnings relationship: MRP on all jobs starts low, increases rather quickly, tops off, and then may decline as skill diminishes or health declines with wage.
If a player and team owner cannot reach an agreement in the their year, then the decision may go to an independent arbitrator, who must choose either the amount the player is asking or the amount offered by the owner. (Arbitration) The effect is dramatic INCREASE in salary.
Along with competitive imbalance, there will also be payroll imbalance as long as MRs are not equal.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team.
MRP theory dictates that players can only earn more if (1) they become more productive (i.e., MP increases) or (2) fans increase their willingness to pay for the result. If it is the case that MR increases, it means that players are more valuable than they used to be in the eyes of the fans. This means that owners will raise prices because fans are willing to pay more. Then, player pay will rise as long as there is competition for the players' services between teams. If salaries caused ticket prices to change, then they should almost always be moving in the same direction. But the empirical fact doesn't show that.
Some other competing explanations for how sports stars get paid:
(1)winner's curse
the over-bidding for the players
(2)bidding wars
essentially, a bidding war ensues when coming in second place is very costly
(3)the winner-take-all explanation
golf, tennis
Discrimination in pay and hiring:
3 factors that may explain variation in pay among individuals
(1) innate ability: all else constant, those with greater ability contribute more of what fans pays to see and are, therefore, expected to earn more
(2) training and experience:
variation in willingness to train or gained experience will contribute to variation in income
(3) statistical discrimination (rules of thumb)
Fan discrimination: fan preferences result in lower pay and reduced hiring by race and gender only because of race and gender rather than ability.
Discrimination can be difficult to identify.
Talent supply side:
(1) opp cost of time
(2) worker job preferences
How can athletes be worth so much?
Marginal revenue product: MRP(W)=MP(W)*MR(W)
MP(W) is marginal product, or the player's contribution to winning percent. IN sports, where market power leads to downward sloping demand functions, MR decreases with output. MRP is the input's contribution to the revenues earned by the team owner.
Experience-earnings relationship: MRP on all jobs starts low, increases rather quickly, tops off, and then may decline as skill diminishes or health declines with wage.
If a player and team owner cannot reach an agreement in the their year, then the decision may go to an independent arbitrator, who must choose either the amount the player is asking or the amount offered by the owner. (Arbitration) The effect is dramatic INCREASE in salary.
Along with competitive imbalance, there will also be payroll imbalance as long as MRs are not equal.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team.
MRP theory dictates that players can only earn more if (1) they become more productive (i.e., MP increases) or (2) fans increase their willingness to pay for the result. If it is the case that MR increases, it means that players are more valuable than they used to be in the eyes of the fans. This means that owners will raise prices because fans are willing to pay more. Then, player pay will rise as long as there is competition for the players' services between teams. If salaries caused ticket prices to change, then they should almost always be moving in the same direction. But the empirical fact doesn't show that.
Some other competing explanations for how sports stars get paid:
(1)winner's curse
the over-bidding for the players
(2)bidding wars
essentially, a bidding war ensues when coming in second place is very costly
(3)the winner-take-all explanation
golf, tennis
Discrimination in pay and hiring:
3 factors that may explain variation in pay among individuals
(1) innate ability: all else constant, those with greater ability contribute more of what fans pays to see and are, therefore, expected to earn more
(2) training and experience:
variation in willingness to train or gained experience will contribute to variation in income
(3) statistical discrimination (rules of thumb)
Fan discrimination: fan preferences result in lower pay and reduced hiring by race and gender only because of race and gender rather than ability.
Discrimination can be difficult to identify.
Talent supply side:
(1) opp cost of time
(2) worker job preferences
Leagues and competitive balance
2 downsides of exclusive territories: the possibility of rival leagues, competitive imbalance.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
9/23/2012
Property
Property is not a set of things but a set of rights and interests. Standard interpretations see property as consisting of rights to possess, use, manage, dispose of, and keep others away from things. Property is also a set of interests, for if the things we own become worthless we no longer have property. All property has always been, in a sense, government largesse. It is LAW that allows a given physical object to be legally acquired or owned by one person and not another.
Property is power compelling service and obedience, as is political sovereignty. We must distinguish between rights to have or do something and rights to merely try to have or do something.
What are the grounds for moral rights to property? One answer is that we are morally entitled to the products of our labor. An important proviso is that if a resource is scarce we should take only as much as would leave "enough and as good for others". To take more of a limited natural resource than one needs and can put to good use is contrary to the requirements of morality.
I have to say this is not plausible in the contemporary world. The unowned wilderness waiting to be appropriated no longer exists. Nearly always we mix our labor with an economic system, an industrial economy, and it makes little sense to think of the result as the outcome of our labor. A person's labor cannot be distinguished from the other labor it is mixed with in producing a product or contributing to production.
Interests, in contrast to rights, need not necessarily be respected for their own sake but are usually to be judged in terms of the further consequences of pursuing them. They are needs or desires or claims for some state of affairs to be effected. Justifiable interests are what we should be good for us in the long run if we were fully enlightened. They are what we would want if we were fully informed and wanted what would be good for us.
Rights are entitlements to something we can either do or have or not do or not have done to us. Interests are matters of more and less.
When interests conflict, we tend to find a moral solution to maximize the a particular criteria. But rights are not subject to maximizing.
Property is power compelling service and obedience, as is political sovereignty. We must distinguish between rights to have or do something and rights to merely try to have or do something.
What are the grounds for moral rights to property? One answer is that we are morally entitled to the products of our labor. An important proviso is that if a resource is scarce we should take only as much as would leave "enough and as good for others". To take more of a limited natural resource than one needs and can put to good use is contrary to the requirements of morality.
I have to say this is not plausible in the contemporary world. The unowned wilderness waiting to be appropriated no longer exists. Nearly always we mix our labor with an economic system, an industrial economy, and it makes little sense to think of the result as the outcome of our labor. A person's labor cannot be distinguished from the other labor it is mixed with in producing a product or contributing to production.
Interests, in contrast to rights, need not necessarily be respected for their own sake but are usually to be judged in terms of the further consequences of pursuing them. They are needs or desires or claims for some state of affairs to be effected. Justifiable interests are what we should be good for us in the long run if we were fully enlightened. They are what we would want if we were fully informed and wanted what would be good for us.
Rights are entitlements to something we can either do or have or not do or not have done to us. Interests are matters of more and less.
When interests conflict, we tend to find a moral solution to maximize the a particular criteria. But rights are not subject to maximizing.
9/22/2012
What is entrepreneur
The origin of the word derives from the French words entre meaning "between" and prendre being the verb "to take". The French economist Richard Cantillan related it to those who carried the risk in the economy. (Risk-taker)
The definition of entrepreneur: a person who habitually creates and innovates to build something of recognized value around perceived opportunities.
"recognized value" means creation of financial capital, social capital and aesthetic capital.
An entrepreneur is someone who knows the right people, can pick a good team, act quickly and make it all happen.
Reasons to be an entrepreneur: seek independence, wait to be his own boss, respond to a challenge, possibility of wealth
The low rating of money and wealth as a motivator with entrepreneurs is against the general perception of the entrepreneur. In reality money is a by-product of the business entrepreneurs, but it is this that people see and , so, assume it to be the main motivator.
internal locus of control: the extent to which people feel they are in control of what happens in their lives.
the main difficulty is one of the cultures where we are suspicious of people who become wealthy.
The definition of entrepreneur: a person who habitually creates and innovates to build something of recognized value around perceived opportunities.
"recognized value" means creation of financial capital, social capital and aesthetic capital.
An entrepreneur is someone who knows the right people, can pick a good team, act quickly and make it all happen.
Reasons to be an entrepreneur: seek independence, wait to be his own boss, respond to a challenge, possibility of wealth
The low rating of money and wealth as a motivator with entrepreneurs is against the general perception of the entrepreneur. In reality money is a by-product of the business entrepreneurs, but it is this that people see and , so, assume it to be the main motivator.
internal locus of control: the extent to which people feel they are in control of what happens in their lives.
the main difficulty is one of the cultures where we are suspicious of people who become wealthy.
9/16/2012
Efficient market theory (notes of math 210H)
There are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, objective, highly motivated and hardworking. h eir analytical models are widely known and employed.
Because of the collective ef orts of these participants, information is rel ected fully and immediately in the market price of each asset. And because market participants will move instantly to buy any asset that’s too cheap or sell one that’s too dear, assets are priced fairly in the absolute and relative to each other.
Thus, market prices represent accurate estimates of assets’ intrinsic value, and no participant can consistently identify and profit from instances when they are wrong.
Assets therefore sell at prices from which they can be expected to deliver risk- adjusted returns that are “fair” relative to other assets. Riskier assets must of er higher returns in order to attract buyers. The market will set prices so that appears to be the case, but it won’t provide a “free lunch.” That is, there will be no
incremental return that is not related to (and compensatory for) incremental risk.
I agree that because investors work hard to evaluate every new piece of information, asset prices immediately reflect the consensus view of the information’s significance. I do not, however,believe the consensus view is necessarily correct.
To beat the market you must hold an idiosyncratic, or nonconsensus, view.
Although the more efficient markets often misvalue assets, it’s not easy for any one person—working with the same information as everyone else and subject to the same psychological influences— to consistently hold views that are different from the consensus and closer to being correct.
Mutual funds are rated relative to each other. The ratings don’t say anything about their having beaten an objective standard such as a market index.
The fact that the Warren Bufetts of this world attract as much attention as they do is an indication that consistent outperformers are exceptional.
Every once in a while, then, people learn an essential lesson. They realize that nothing— and certainly not the indiscriminate acceptance of risk— carries the promise of a free lunch, and they’re reminded of the limitations of investment theory.
• the asset class is widely known and has a broad following;
• the class is socially acceptable, not controversial or taboo;
• the merits of the class are clear and comprehensible, at least on the surface; and
• information about the class and its components is distributed widely
and evenly.
If these conditions are met, there’s no reason why the asset class should systematically be overlooked, misunderstood or underrated.
Where might errors come from? Let’s consider the assumptions that
underlie the theory of efficient markets:
• There are many investors hard at work.
• They are intelligent, diligent, objective, motivated and well equipped.
• They all have access to the available information, and their access is
roughly equal.
• They’re all open to buying, selling or shorting (i.e., betting against) every
asset.
But it’s impossible to argue that market prices are always right. In fact, if you look at the four assumptions just listed, one stands out as particularly tenuous: objectivity. Human beings are not clinical computing
machines. Rather, most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes.
Whereas investors are supposed to be open to any asset— and to both owning it and being short—
the truth is very different.
A market characterized by mistakes and mispricings can be beaten by people with rare insight. h us, the existence of inefficiencies gives rise to the possibility of outperformance and is a necessary condition for it. It
does not, however, guarantee it.
Respect for ei ciency says that before we embark on a course of action, we should ask some questions: have mistakes and mispricings been driven out through investors’ concerted efforts, or do they still exist, and why?
All that means is that prices aren’t always fair and mistakes are occurring: some assets are priced too low and some too high. You still have to be more insightful than others in order to regularly buy more of the former than the latter.
Swallowing theory whole can make us give up on finding bargains, turn the process over to a computer and miss out on the contribution skillful individuals can make. The image here is of the efficient-market-believing instance professor who takes a walk with a student.
“Isn’t that a $10 bill lying on the ground?” asks the student.
“No, it can’t be a $10 bill,” answers the professor. “If it were,someone would have picked it up by now.”
The professor walks away, and the student picks it up and has a beer.
9/05/2012
Some thoughts on the high salaries of super athletes
If you analyze the salaries of athletes in 4 major leagues, you will see that
(1) the median salaries are always dramatically less than the average salaries
(2) the top salaries have been more than 10 times the median salaries since the 1980s
(3) salaries rises quickly
source of salaries
(1) endorsement
endorsement earnings typically double the income of male superstars, as for female stars, the multiplication can be 10 times
(2) salaries
even though sports stars are paid handsomely, they are not even in he same league with other entertainment superstars, generally speaking.
MRP(marginal revenue product) = MP * MR
MP: this particular player's contribution to winning percent
MR: marginal revenue generated by the player's contribution to winning (depend on fans' willingness to pay)
MRP is the input's contribution to the revenues earned by the team owner
MRP unravels the faulty logic behind the idea that higher player salaries drive up ticket prices. MRP theory dictates that player can only earn more if (1) they become more productive (MP rises) (2) fans increase their willingness to pay for their result (MR rises and the contributing factors can be population, size of cities, etc)
MR rises means that stars are more valuable in the fans' eye and owner will raise prices since fans are willing to pay more.
The reason players make more is that a change in some demand parameter (income, population, preferences) has increased fans' willingness to pay
(1) the median salaries are always dramatically less than the average salaries
(2) the top salaries have been more than 10 times the median salaries since the 1980s
(3) salaries rises quickly
source of salaries
(1) endorsement
endorsement earnings typically double the income of male superstars, as for female stars, the multiplication can be 10 times
(2) salaries
even though sports stars are paid handsomely, they are not even in he same league with other entertainment superstars, generally speaking.
MRP(marginal revenue product) = MP * MR
MP: this particular player's contribution to winning percent
MR: marginal revenue generated by the player's contribution to winning (depend on fans' willingness to pay)
MRP is the input's contribution to the revenues earned by the team owner
MRP unravels the faulty logic behind the idea that higher player salaries drive up ticket prices. MRP theory dictates that player can only earn more if (1) they become more productive (MP rises) (2) fans increase their willingness to pay for their result (MR rises and the contributing factors can be population, size of cities, etc)
MR rises means that stars are more valuable in the fans' eye and owner will raise prices since fans are willing to pay more.
The reason players make more is that a change in some demand parameter (income, population, preferences) has increased fans' willingness to pay
Worries over Three-gorge dam
i'm shocked to learn that dams cause so many troubles to local environment. The three-gorge dam in China has 5 major problems
(1) because of the imbalanced distribution of water resources, the chinese government mandates that water should be redistributed from south to north to enhance the development of north. But the problem of shortage of north china is largely due to man-made destroy of forests and wetland. Let alone the problem of fairness, government somewhat misses the real problem and causes some real trouble. For example, the dam damages the equilibrium of water supply and in 2006, sea water poured into Huangpu River in Shanghai 3 times because of the man-made change of river flow direction.
(2) the reservoir to some extent becomes a man-made big water pool and inevitably it changes the local weather. IN 2006, Chongqing suffered from unusual scorching weather. The ground temperature even approached 77 degree centigrade.
(3) the existence of dam break down the water path so that some kinds of fishes cannot swim back to upper reaches of Changjiang River to reproduce. The biodiversity is damaged.
(4) Changjiang River brings down to lower reaches delta large amount of silt. Silt stacks and forms the basis of Shanghai. The existence of the dam obstructs Changjiang river (reduce the risk of floods) but at the same time stops the silt. Without the continuous protect of silt, sea water "erodes" Shanghai.
(5) The construction of the dam stops the normal flow of the river, some chemical materials gather and eutrophication of water occurs.
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