Investing in Bonds and Diamonds: A Study of Baseball’s Financial and Competitive Imbalance, by Donald F. Leypoldt, Jr.

            On November 6, 2001, the owners of Major League Baseball (MLB) voted 28‑2 to contract by two teams.  This was a 180 degree turn from MLB's previous forty years, in which the league almost doubled in size.  The primary driver of the contraction vote was whether or not certain "small market" teams could be competitive, both financially and on the playing field. 

Commissioner Allan "Bud" Selig addressed both of these issues in his statement postponing contraction.  "The clubs recognize that our current economic circumstances make contraction absolutely inevitable, as certain franchises simply cannot compete and generate enough revenues to survive¼We remain committed to obtaining competitive balance in the game, which fans in all our markets say is the top priority, and (we) will take the steps necessary to achieve it."  

These two issues, revenue imbalance and competitive imbalance, have seemingly plagued MLB in recent years.  After all, from 1980 to 1986, 20 of baseball's 26 teams made a League Championship Series.  From 1995 to 2001, only 11 of baseball's 30 teams made an LCS.   In 2001, the New York Yankees brought in over $242 million in revenue.  This is nearly $28 million more than the 2001 revenues of the Kansas City Royals, Florida Marlins, Minnesota Twins and Montreal Expos combined.  On the other hand, MLB's two lowest payroll teams, the A's and Twins, won 58% of their games in 2001.  In 1990, three of the four poorest teams (in terms of revenue) were the Braves, Indians and Mariners, who collectively have made seventeen playoff appearances since 1995.  Is there a strong financial imbalance in MLB?  If so, how does that impact competitive balance on the playing field?  This article summarizes the results of an independent paper that studied financial and competitive imbalance in MLB today.      

After analyzing team's revenue data, payroll and winning percentage, the paper found:

·                     From 1990 to 1993, the average team in the World Series (WS) ranked between 12th and 13th (out of 26 ballclubs) in terms of revenue.  From 1995 to 2001, the average World Series team ranked 6th (out of 30 ballclubs) in revenue.  Payroll numbers had a similar jump, from the average WS team having the 10th highest payroll in MLB in the early 1990s, versus the average WS team having the fourth highest payroll between 1995 and 2001.  This means that wealthy teams are making it into the World Series at a much higher rate than their poorer cousins.

·                     In statistics, the R‑squared number measures the correlation of two variables.  A low percentage means that there is little correlation; a high percentage means that there is a great deal of correlation.  In 1990, the R‑squared between a team's revenue and its winning percentage was an insignificant 1.4%.  This correlation jumped continuously in the 1990s, topping out at 44% in 1997.  It has since leveled off to 26.5% in 2001.  While decreasing somewhat in recent years, revenue has become an increasing factor in a team's on‑field competitive ability during the last eleven seasons.  A similar trend holds true for payroll.

·                     ×From 1990 to 1994, teams in the top quartile of revenue won 51.5% of their games, while teams in the bottom quartile of revenue won 47.5% of their games.  From 1995 to 2001, the gap widens.  The wealthiest quartile won 56% of their games, while the poorest quartile won only 46%.

 

Table One: Winning percentage of MLB teams by revenue and payroll quartile