Spring 2009 | Finding the balance
Kevin Quinn (left), Annie Berkovitz ’09 (right) and Melissa Geier ’09 at Lambeau Field, home of the Green Bay Packers
Finding $50 bills in the NFL draft
By Kevin G. Quinn
Associate Professor of Economics
How good economics could help build better teams
Read an excerpt on the history, economics and culture of the relationship between spectator and sport.
My profession’s elemental unfunniness is responsible for its enduring moniker as “the dismal science,” a tag put upon us economists by Thomas Carlyle, a Victorian historian and fallen-away Calvinist – someone who surely knew dismal when he saw it.
Jokes about us include side-splitters like this one: “Two economists are taking a walk when one exclaims, ‘Hey, look – there’s a $50 bill on the sidewalk!’ The other never breaks stride, chiding, ‘No there isn’t. If that was a $50 bill, then someone would have already picked it up.’ ”
Not everyone shares that imputed, cultish faith in the efficacy of markets. Sports professionals, for example, are naturally very competitive people, or they would opt for another line of work. They are certain that there are all kinds of $50 bills on sidewalks, and success means picking up more of them than the next guy. Where economists see futility, sports people see opportunity. They must be on to something – sports usually get better TV ratings than economics does.
The NFL is by far the biggest American spectator sports business, and cuts big paychecks. According to USA Today, the league’s total 2008 payroll for its roughly 1,800 players came to more than $3.6 billion, an average of about $2 million per player.
Even if NFL teams had unlimited funds to spend on players they still could not afford to overlook any $50 bills that might be found in player labor markets. The league’s highly effective salary cap system means that every dollar spent on one player is one that can’t be spent on another. The payroll decision facing NFL general managers, therefore, truly is an Econ 101 textbook problem: How should limited resources be spent so as to satisfy an unlimited desire to win?
Two current seniors,
Annie Berkovitz ’09 and
Melissa Geier ’09, and I have investigated this question by applying economic theory to analyze how teams did their “capology” during 2000 to 2005. We found that the NFL’s cap system is actually extraordinarily well-designed. The few loopholes that allow movement of cap dollars across years are extremely limited; further-more, teams generally take advantage of them in the same manner, so none can find any real competitive advantage.
A more surprising finding was that teams distribute scarce cap dollars across their rosters in nearly identical fashion. Over the course of the seasons studied, teams clearly sought to spend about 10 percent of their cap on the top-paid player on their rosters, 8 percent on the second-highest, 7 percent on their third-highest, and so on. The distributions across rosters were amazingly identical, with no discernible difference between teams that enjoyed significant success during the period and those that did not.
The bottom line is that NFL teams cannot buy their way to championships, or even to winning seasons. Nobody is finding any $50 bills by working the cap system. Instead, the difference between winning and losing is to be found elsewhere – in the ability to evaluate talent.
With an average player career of only three-and-a-half years, teams are on a constant hunt to restock their roster. If there are $50 bills lying about, they most likely are in the draft, not the free agent market. Free agent players’ abilities are generally fairly well-established, and the few major talents available each year enjoy a frenzied auction for their services – no bargains there.
While a few young gems might be found in another team’s discard pile, those that show any signs of competence whatsoever are almost always retained by their incumbent team. And for good reason – younger players’ inability to negotiate with any but their incumbent team means that they command substantially lower salaries than would a free agent of equal ability.
This means that NFL success depends heavily on good draft decisions, although the top 10 players chosen each year do earn some serious cash. As a group, the 10 players selected first in the 2009 draft will cash checks for a total of $50 million their first year, with their teams committed to paying them tens of millions more over the next several seasons should they remain on their roster.
Paying a million $50 bills to 10 unproven players is quite puzzling, prompting a few sports economists to take a systematic look at the NFL draft. We’ve found that a few top picks will be legitimate stars worthy of their pay, but more of them will not even come close to justifying the salary cap burdens to their teams.
On average, first-rounders are definitely better players than their lower-picked brethren, but the pay difference between these two groups simply is not justified by differences in their career performances.
One study, by Yale economist Cade Massey and his former University of Chicago mentor Richard Thaler, found that the best value is to be found near the middle of the second round.
Annie, Melissa and I came to similar conclusions in our own work. Whatever $50 bills might exist in the draft are not to be found in the first round, but later – if a team can figure out how to discern them from a raft of fives and singles.
Winning teams are those that have this ability. The 1996 Packers Super Bowl team offers a case in point. Fourteen of their 22 starters had been drafted in the third round or lower and two of them (George Koonce and Eugene Robinson) had not been drafted at all.
The general consensus among economists is that teams should be in a hurry to try to trade first-round picks for collections of third-, fourth- and fifth-rounders; i.e., to play a venture capital game. A bevy of later-round players will on average deliver more bang for the buck than a single first-rounder, even if the latter is far more likely to make a Pro Bowl than his less flashy teammates.
There is some evidence that suggests that the willingness to trade down or across years is associated with higher winning percentages. Trading picks across years may be an even more effective draft strategy.
My St. Norbert colleague
Paul Bursik (Business Administration) has conducted a painstaking analysis of such trades, and has found strong indication that those franchises that give up this year’s picks for more picks next year are among the NFL’s most successful.
Teams’ reluctance to recognize these $50 bills might come down to public relations. Fans of teams coming off of poor seasons might not be thrilled with forgoing this year’s JaMarcus Russell, even if drafting him this year means passing on next year’s Matt Ryan plus Matt Forte.
Look here for web-only content that expands on topics presented in the current
St. Norbert College Magazine (PDF).
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