Tuesday, March 04, 2008

The NFL, Free Agency, and the Market

I'm endlessly fascinated with how the underlying economic models of different sports leagues influences their games. The MLB is what it is because of its lack of a salary cap and revenue sharing. The NBA is doomed to long-term failure because it's the only league to have both guaranteed contracts and a salary cap (which produces trades like the Van Horn deal and keeps 70 percent of the league mired in mediocrity for years at a time).

So looking at this year's NFL free-agent signings, I wonder if there's something about its structure which causes mid-level players to be over-valued. Looking at the deals being given to this year's free-agent crop, these players seem to be making more money than they probably should, if we were to assume that there is something like a constant dollar-per-unit-of-value rate by position. For instance, is a quarterback basically paid some dollar per QB rating point, or a defensive end some dollar per sack. (I'm abstracting all of this to an absurdly high level, but humor me.)

What I'm getting at, is that if you look at the top performers at each position, and see how much they're being paid, the free agents being signed seem like they're getting more money that you'd expect, given their stats. So I wonder if the free-agency regime distorts the market by encouraging teams to lock up players of the highest-caliber, to prevent them from ever going on the open market. This means that the free-agent players who do come to market are rarely of that first-tier in quality. But since those Grade A players are never available on the market, the market pays the best free-agents who are available (who might be Grade B or Grade C players) something closer to Grade A value?

Update: Astute Galley Reader J.T. writes in:

Salary structure within the NFL is skewed by the price controlling
franchise player tag. Typically a player who gets franchised is at or
near the top of his game and regarded by the team, his peers and fans at
large as one of the best players at his position. By excluding this
particular player from the free agency pool rather than diminishing the
value of other players in the pool, drives them higher. A fair to
middling cornerback will get a bigger contract from teams looking for a
cornerback because they cannot get the best cornerback that would have
been on the market, had his team not franchised him. The supply has
shrunk, but the demand has not, as even the team franchisng the player
has need of another cornerback. Decreased supply without a
corresponding drop in demand will result in a higher equilibrium point,
and therefore larger salaries. Further, because contracts are not
guaranteed, NFL teams feel free to issue four year deals, intending to
cut the player after three years, if not two. The size of the deal is
less important than the signing bonus. So Mr. Fairto Middling can
expect a big deal, with a modest signing bonus (the guaranteed portion
of the deal) and to be back on the market at least one year before the
deal is done. If he plays well and avoids getting cut (or wisely signs
with the Redskins, who seemingly are unbound by the NFL's salary cap) he
may even earn the full announced value of the contract.


Anonymous said...

I agree, but assumed it was sorta obvious (supply and demand???)

I think I actually read an ESPN piece yesterday regarding Samuel leaving the Patriots.... It contained the same gist, although he is clearly a top-tier player.

Anonymous said...

Wow - "astute galley reader" gets props for spelling out the obvious but I get nothing?

No offense to J.T., but next time I will have to discuss equilibrium points and maybe throw in a demand curve (what about elasticity?) to get some respect around here.