Sports Economics
May 4500
Chapter 8 - Answers
Review Questions
4.
What is the reserve clause? How was it used to end player freedom of movement between teams?
Answer: The reserve clause was an option that could be chosen by an owner to extend a player’s
contract every year for the same salary indefinitely. The player was prevented from marketing his
skills to other teams and was in effect tied solely to the team that first drafted him. The reserve
clause prevented a player from leaving a team to play for another team; the only option a player
had if he did not accept the contract was to not play at all.
6.
Give the usual owner argument in support of the reserve clause.
Answer: There were three arguments typically offered. First, a player was not likely to perform to
his fullest potential (put for the greatest amount of effort) against a future employer. Second,
fans would lose identity with a team player if players changed teams. Third, competitive balance
would suffer as the larger market teams with more revenue would be able to buy all the top
talent.
11.
What is shirking? What is strategic effort? What effect does each have on long-term contracts?
Answer: Shirking is expending less than full effort when working for another. This is known as
moral hazard in principal-agent theory. Strategic effort involves a player altering his performance
at strategic points in his career; typically this means putting forth more effort prior to contract
negotiations and less effort after signing a contract. Long term contracts encourage both shirking
and strategic behavior in that a player’s incentive to put forth optimal effort is diminished if his
contract (pay) does not depend on such effort.
12.
State Rottenberg’s invariance principle.
Answer: The invariance principle is as follows: “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 the players’ MRPs.” This principle implies that competitive
balance will stay the same regardless of free agency rights or limits.
Thought Problems
3.
Why didn’t all players just let their current contract run out and refuse to play until the owners
gave in and removed the reserve clauses from all contracts?
Answer: This is the usual logic of free riding in action. An individual player might think as follows.
If all the other players holdout and actually do get the reserve clause revoked, but I go ahead and
play anyway, then I get the benefits of a free market for my talent without having to have paid any
cost in terms of lost income during a holdout. But if all players think this way, the holdout never
occurs and the reserve clause is never really seriously challenged by player action.
8.
How do owners protect themselves against shirking in long-term contractual arrangements with
players? How do owners protect themselves against strategic effort by players with long-term
contracts?
Answer: The usual approach is to monitor effort. Sports staffs are extensive and a goodly portion
of their job is to monitor how hard players are working. The press also helps with this function.
There are many other players to use to compare to any particular player. Incentive compatible
mechanisms, especially contract contingency payments and clauses, are the main tools for
combating strategic effort near contract renewal time.
9.
Despite how closely players are watched throughout their careers, what evidence do we find in
actual contracts that shirking and strategic effort can still be a problem for owners?
Answer: If shirking were not a problem, staffs would not need to have portions of their time
devoted to monitoring extensively, especially when it comes to being the full-time job for some
individual staff members. The actual contingency payments and clauses in contracts are the
evidence that it remains a concern.