Musings on Sports Economics

Myth 1: It’s too hard to figure out how to pay players fairly.

(Back to Introduction)

This myth rests deeply in the assumption that if we deign to allow college players to be paid, there would have to be a nationwide agreement by all 345 Division I schools (or perhaps just the 122 in FBS, the football bowl subdivision[1]) as to what each student would get, and it would be a nightmare, with committees meeting annually to review compensation to make sure it was fair to schools and athletes, and endless debates over the optimal pay level.

It makes you wonder how the Software Industry Wage Committee ever decides how much to pay computer programmers and how the Law Firm Pay Commissariat decides on associate and partner compensation each year.

The solution, of course, is just to pay them.  There is no need for a central committee to make this decision.  Since 1776, with the publication of Adam Smith’s “The Wealth of Nations,” we’ve understood that markets generally find their way to efficient outcomes without the need for a committee, NCAA or otherwise, acting as a wage politburo.  No centralized commission or study group is needed to decide what we should pay the athletes.  Let schools make offers, and let incoming high school athletes and their parents decide which to accept.  Competition is a wonderful thing, on the playing field and in the marketplace.  This is how salaries are set across the world.  This is probably how your pay was set.

At first it might be a little messy, just as when a firm prices its stock in an IPO.  The initial price may end up higher or lower than the right value, but the company picks a price, sells its stock, and then the market adjusts.  For example, Linked-In went public on May 19, 2011 and closed up 107% from its initial offering after two days of trading.[2]  The following month, Pandora went public but closed down 20% two days after its launch.[3]  Opening up the market for student-athletes would not be much different.  At first, many schools might continue to offer the Grant in Aid (“GIA”) package without additional cash.  A few programs might want to set the gold standard and offer $10,000 stipends.  A few up-and-comers might make a play for some talent and offer $25,000 to see if they could jump-start their programs at a higher level.  The following year, maybe a few more schools would up the ante, and maybe some of the Old Guard might start matching offers to avoid losing talent.  Just as water finds its own level, so too do prices in a liquid market.  A decade in, everyone would have a great sense of what a blue chipper is worth to a program and what it takes to land him.  Problem solved.

(Next Myth)

[1] The NCAA has rebranded Division-IA as the football bowl subdivision, or FBS.  The old Division IAA is now called FCS, the football championship subdivision.

[2] Ari Levy & Lee Spears, LinkedIn Retains Most Gains Second Day After Surging in Initial Offering, Bloomberg News, May 20, 2011

[3] Lee Spears, Pandora Plunges Below IPO Price, Reversing Yesterday’s Gains, Bloomberg News, June 16, 2011 See also Jennifer Saba and Charlie Baldwin, Update 1-IPO VIEW-Profitless Pandora Picks the Tech Bubble, REUTERS.COM, June 17, 2011

Posted by
Andy Schwarz

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