NBA Owners Do Not Understand Competitive Balance

In the July 25th edition of Sports Illustrated we saw the following statement (from a story about Derek Fisher and the NBA labor dispute):

The league contends that owners and players together will grow financially and thrive in competitive balance as long as the richest teams aren’t permitted to overspend and the smallest markets are assured of profitability.

This one sentence seems to suggest much that is inconsistent with the evidence. To see this, here is what I think we know about competitive balance in the NBA.

1. The NBA – relative to the other major North American sports – is relatively imbalanced.  And this has been true throughout the tenure of David Stern.

Competitive Balance in the Stern Era.

Roger Noll and Gerald Scully developed a measure of competitive balance that involves calculating the ratio between the level of competitive balance we observe and the ideal level of balance (the calculation is detailed in many places, including The Wages of Wins). For the NBA, here is the average value for this ratio in the 27 years since Stern became commissioner (in 1984) and the 27 years before Stern took over the NBA (Editor’s Note: In a perfect world the measure would be 1.0).

  • Competitive balance ratio in the NBA from1984-85 to 2010-11: 2.8
  • Competitive balance ratio in the NBA from 1957-58 to 1983-84: 2.5

So the NBA, both before and after Stern, has consistently had a ratio in excess of 2.0. To put that in perspective, here is the same snap-shot for the NHL, NFL, and both leagues in baseball.

  • NHL: 1.7 since 1984, 2.1 before 1984
  • NFL: 1.5 both before and after 1984
  • AL: 1.8 both before and after 1987
  • NL: 1.7 since 1984 and 1.8 before 1984

As one can see, the other sports have generally had a ratio below 2.0. And that means – relative to other North American sports – the NBA is not very balanced.

One should note that historically baseball used to look like the NBA today. In the first half of the 20th century, the AL and NL both had an average ratio of around 2.4. How baseball improved – and how the NBA has not – is important to our explanation of what drives competitive balance. Before we get to that story, though, let’s talk about what doesn’t seem to drive balance in a sports league.

2. Salary caps, payroll caps, luxury taxes, and revenue sharing don’t seem to have much impact on competitive balance.

Capped at $5.5 Million and $22 Million and still can't compete.

David Stern and the NBA owners want to impose further limits on the spending of owners in the NBA. The NBA (in 1984) was the first to impose any kind of cap on team payroll. And in 1999 the NBA was the first leage to cap the salaries of individual players. As one can see, the 1984 cap didn’t alter competitive balance. And since 1999, the average ratio in the NBA has been 2.7. So the 1999 salary cap also didn’t seem to have much impact on balance.

This is not a surprising result. Martin Schmidt and I presented research this past summer that looked at the impact of various institutions (i.e. salary caps, luxury taxes, etc…) the NBA, NHL, NFL, and Major League Baseball have created to alter competitive balance. We found that none of these institutions had any statistically significant impact on balance in any of these leagues.

One should add that Martin and I are not the only researchers to look at how league institutions impact balance. Tony Krautmann and John Solow published research recently that indicated that increased revenue sharing in baseball also failed to impact competitive balance. Krautmann and Solow, though, did find that revenue sharing reduces the wages paid to players.

So the institutions that leagues use reduce wages but don’t seem to change competitive balance. Before moving on, let’s briefly note what seems to drive balance in a league. As we have shown in past research (and as discussed in The Wages of Wins), competitive balance in a league are primarily about changes in the population leagues draw upon for talent. For example, racial integration had a positive impact on competitive balance in baseball. And an influx of foreign talent in hockey (as Marty and I noted in our research this summer) led to more balance in the NHL.

Although the NBA also draws upon foreign talent, the impact on balance isn’t seen because the population basketball teams draw upon – even when we consider the entire world – is still quite small. Specifically, NBA teams require really tall athletes. And since tall athletes are in short supply, the NBA persistently has a problem with balance. In other words, the supply of dominant players – like LeBron James and Dwight Howard – is quite small. Some teams get these amazing players. And others have to employ players like Andrea Bargnani and Travis Outlaw.

3. There is no relationship between market size and team wins.

9.6 Million fans vs. 1.6 Million fans. Both win titles. . . .

The NBA has one team located in Salt Lake City (1.1 million people in metropolitan area) and one team located in Chicago (9.6 million people in metropolitan area). Such disparities in market size leads people to suspect that teams located in smaller markets are at a competitive disadvantage. But when we look at the average number of wins from 1999-00 to 2010-11 and the population in each metropolitan area, we fail to find a statistically significant link. In sum, market size and on-court success are not related.

One can also look at payroll and wins across this same time period. We do find a statistically significant link between team spending and wins. But team payroll only explains 6% of the variation in team wins. In other words, teams are not able to effectively buy wins in the NBA.

4. Fans don’t seem to care much about competitive balance.

Like it or not people tuned in to watch.

But what if the richest teams could actually buy wins effectively? Wouldn’t that cause a problem for the league?

Researchers have looked at the link between competitive balance and league attendance in baseball. As noted in The Wages of Wins, the link is quite small. Two different studies found that in baseball, a movement from the most competitive position in league history to the least competitive position in league history would only result in about a 15% increase in attendance. Yes, that is something. But that is all you get from a move from the least balanced position to the most balance.

Recently I have looked at this same issue in the NBA. And the preliminary results seem quite similar. NBA fans don’t seem to care much about competitive balance. To illustrate, the NBA was much more balanced in the late 1970s, but it was not very popular. As noted, since Stern took over the NBA has not been balanced at all. And yet per game attendance has risen from about 11,000 in 1983-84 to more than 17,000 this past season. Furthermore, the league’s television contract has risen from less than $40 million per year (for the entire league) in 1984 to more than $900 million per year today.

Despite all this evidence, though, owners are still demanding salary concessions in the name of competitive balance. And as noted in the past, owners of professional sports teams have made this argument since the 1870s. So it is not surprising to see this story being told. But one hopes is understood – at least someday – is that the owner’s argument is not supported by the empirical evidence.

Let me close with an unrelated note from the aforementioned Sports Illustrated article. The following paragraph from the article clearly has a Wages of Wins theme:

The owners maintain that a hard ceiling on team salaries is crucial, citing the failure of even the luxury tax to curb teams’ overspending. Fisher says that a hard cap would encourage each team to budget the majority of its payroll for two or three stars, leaving other players to not only compete for the remaining money but also to do so largely on nonguaranteed contracts. “What we envision is a cannibalist-type system, where you would constantly be in competition with your teammates over shots and points and minutes,” says Fisher. “We’ve had a problem over the years convincing fans that guys really do care about playing as a team and wanting to make a sacrifice to win a championship and not just thinking about themselves.”

The Wages of Wins argued that salary in the NBA was primarily driven by scoring. And this argument was echoed in Stumbling on Wins. Here we have a quote from Derek Fisher confirming this notion. Yes, the players know what gets them paid. And that means players are not just competing to win games, they are also competing with each other for shot attempts and ultimately salaries. This feature of the labor market, though, isn’t about the league’s collective bargaining agreement. It is really all about the NBA’s confusion about what drives wins.

Of course – like the competitive balance story above – the link between scoring and pay has been discussed before. And like the competitive balance story above, one should expect that the link between scoring and pay will be discussed again.

- DJ

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