1. Introduction

A lot of studies look at the effects of pay inequality on performance. DeBrock, Hendricks and Koenker (2004) had study the effects of pay inequality on performance in Major League Baseball (MLB . There results conclude that pay inequality is associated with poor performance. Frick, Prinze and Winklemann (2003) study the effects of pay inequality in all four major leagues in North America. They find that inequality improves team performance in basketball and worsens team performance in baseball. They find no statistically significant effect of inequality on performance in football and hockey. This paper looks at the effects of inequality on performance in MLB. It differs from that of DeBrock, Hendricks and Koenker (2004) in that it uses the most recent data. While the previous authors use data from 1985 through 1998, I use data from the latest two seasons: 2003 and 2004. Another difference is that I use a different measure of pay inequality. Rather than the Herfindahl index, I use the percentage of payroll earned by the best paid 20% of players. I chose the share earned by the top 20% players for two reasons: it is somewhat easier to calculate, and its magnitude is easier to interpret. 2. Data

The data on pay inequality was constructed in the following way. From the USA Today salary database, I collected annual salaries for each player in all MLB teams during the 2003 and 2004 seasons. I summed the salaries of all players for each team and each season to obtain the total payroll. The active roster in baseball is 25, but the database includes salaries of disabled players as well. Therefore, the number of players for each team ranges from 25 to 31. As the measure of pay inequality, I calculated the percentage of payroll earned by the highest paid 20% of players. For example, for a 30 player team I summed the salaries of the highest paid 6 players and divide that amount by total payroll. If every player earned the same amount, the best paid 20% would earn exactly 20% of the payroll. When pay is unequal, this measure is higher than 20%. The higher the share of payroll earned by the top 20% of players, the higher the pay inequality.

To measure performance I use the percentage of games won in the regular season. This data comes from BaseballReference.com. It does not include performance during league championships or the World Series. However, with 162 games per regular season, the winning percentage can be regarded as a reasonable measure of performance. This is also the measure used by DeBrock, Hendricks and Koenker (2004). In addition to pay inequality and performance, I use data on the total payroll of each team. This is a measure of financial resources which could be an important determinant of performance. I measure payroll in current dollars and do not adjust for inflation. While 2003 dollars are not exactly comparable to 2004 dollars, 2003 inflation was low enough not to influence the results significantly.

Table 1 shows the descriptive statistics of each variable. In the first row we see that on average the highest paid 20% of players earn about 61% of the total payroll. This implies that on a 30 player team, the six best paid players earn more than the remaining 24 combined. According to this measure, the team with the most equitable pay is the New York Yankees during the 2003 season when the top 20% of players earned only 42% of total payroll. The team with the highest inequality was the Colorado Rockies during the 2004 season. On that team, five players earned more than 78% of the team’s total payroll.

The second row in Table 1 shows that the average winning percentage is 50% which has to be the case since for every game won there is a game lost. The Detroit Tigers have the lowest winning percentage in the data with only 26% of games won during the 2003 season. The maximum winning percentage in the...