The field of sports economics has grown dramatically over the past few years. Unfortunately, much of this research (being published in academic journals and/or presented at academic conferences) is often not accessible to non-academics. To help remedy this issue, the Wages of Wins Journal has elicited the help of Jill Harris. Jill earned her Ph.D. in economics from Oklahoma State University. She has taught Principles of Microeconomic theory, Economics of Sport and Economics of Crime for more than 20 years in public and private institutions and is currently teaching at Pitzer College and Pomona College. Her research interests include cheating in the NCAA, detecting the Hot-Hand in sports (especially water polo), and non-compliance behavior in organizations and industry. In this post, Jill examines the incentives Michael Phelps has to come out of retirement.
Michael Phelps put his name back on the drug testing list—a signal to would-be competitors he may come out of retirement for the next Olympics. As Swimming World Magazine reported he will have to wait nine months before competing; but, showing up on deck in Minnesota to put in some yardage makes the signal a credible threat. So it looks like Phelps may very well re-enter this highly competitive environment (and compete for one of a fixed number of slots on the Olympic squad).
Talent often retires…too soon. (Jordan, the rock star formerly known as Prince, fill in your favorite example here). But, in the case of Phelps the decision may not be as simple as an itch to get back in the (swim) lanes. He already owns the record for most decorated Olympic athlete with his 22 medals. In this regard, he has nothing to prove. However, competing puts him back in the spotlight and could increase his wages. Phelps’ agent, Peter Carlisle of Octagon, once estimated Phelps’ likely earnings from endorsements due to his Olympic performance would be $100 million over his lifetime. Forbes estimated Phelps’ net worth at $40 million last year. A nice sum, but perhaps paltry in comparison to other athletes with Phelps’ attributes.
Phelps is reported to be 6’4 and 194 pounds. What makes him particularly good in butterfly is his wingspan—6’7 and size 14 feet. Nice paddles! So, let’s say Phelps had shown up on a basketball court instead of a pool deck all those years ago and presume he developed into a solid defender or shooting guard. Maybe on the order of Tony Allen (go Pokes!). Allen just resigned for $5 million a year with the Grizzlies. (Given Allen’s Wins Produced, this may be a bargain, given his age – maybe not!). If we take Carlisle’s projected $100 million and discount it conservatively at 3 percent over just 20 years it has a net present value of $55 million (a little more than his estimated net worth). If Phelps has to make this last over the next 20 years and does not have another source of wages or income it essentially provides him with $2 million a year. And this is less than half of Allen’s contract.The point is: the basketball playing Phelps may have been better off than the Olympic swimmer Phelps!
Add to this back-of-the-envelope type of analysis the fact that Phelps’ endorsement money could be subject to volatility given his preferences and behavior over the next 20 years and you may come to the same conclusion: Phelps – relative to other professional athletes – may not be paid that well. So given his financial incentives, it seems like Phelps will (butter)fly again. See you in Rio!
– Jill Harris