Mlb Economic Project
Does inequality in term of wage affect team performance?
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
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
References: DeBrock, Lawrence, Wallace Hendricks, and Roger Koenker. 2004. Pay and performance: The impact of salary distribution on firm-level outcomes in baseball. Journal of Sports Economics 5 (August): 243–261. Frick, Bernd, Joachim Prinz, and Karina Winkelmann. 2003. Pay inequalities and team performance: Empirical evidence from the North American major leagues. International Journal of Manpower 24: 472-491.