Sunday, May 16, 2010

Free Agency and the Coase Theorem

I recently came across an interesting point from "The Wages of Wins," a 2006 book by a trio of sports economists.

Many have argued that free agency has hindered the competitive balance in professional sports, because the rich teams can just buy up all the best players. The authors note that this talent hoarding has always been possible. They invoke the Coase theorem, which states, among other things, that resources tend to go toward their more valued uses, regardless of the initial property rights.

The teams in the biggest markets still had the highest relative value for talented players, because winning in these cities is more lucrative. Today's Yankees outbid the rest of baseball for the services of Mark Teixeira and C.C. Sabathia on the free agent market. But the 1920 Yankees acquired Babe Ruth by sending $100,000 to the Red Sox. The richest teams could still acquire the best players, but now a lot more of the profits are going to the players instead of the teams that trade them away.

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