This is a review of the MLB payroll research conducted by Martin Kleinbard applying cross sectional analysis and longitudinal analysis.
Over the years, there has been a complaint among stakeholders in the MLB that a payroll inequity creates an uneven playing field among the teams. Is there any validity to this argument?
If money plays a role in winning then there should be a trend over past years between winning and payroll, with teams that pay out larger salaries consistently being champions. To determine if this is true an R-squared linear regression of payroll on regular season wins is run. The higher the R-squared value the greater the relationship.
In order to create a competitive league it is necessary to minimize any impact afforded to a team who has the budget and willingness to spend large sums of money on players’ contracts.
The first method used to test this idea is a cross-sectional analysis comparing the MLB with the NBA and NFL. The Win Buying Index is compared to the Payroll Inequality Index of each league through the 2001 to 2012 seasons. MLB, the league with the fewest restrictions on payroll, has the highest index in both categories while the NFL, the league with the greatest payroll restrictions, has the lowest. However, the Win Buying Index is below 20% for all three leagues, indicating a poor relationship between payroll and winning. The Win Buying Index and Payroll Inequality Index for the NBA and NHL, both of which institute salary caps, have a negative correlation clearly indicating that a reduced payroll inequality is not the cause for their lower indices.
The second method used to test the idea is a longitudinal analysis looking strictly at the MLB over its history. Free agency was instituted in 1977, however, prior to this was an Under the Reserve Clause system stating that any team that initially signed a player had total control over his contract throughout the player’s career. This created a low payroll inequality, which did not create a low Win Buy Index, but instead a larger one. This was likely due to the fact that while teams had control over contracts, only the wealthiest teams were able to maintain extensive scouting networks, giving them the ability to find the best talent available.
When the draft was implemented in 1965, the average Win Buying Index dropped across the league. All teams now have the ability to acquire talented young players who will receive a lower payroll. This raises the question of how dominant young players are relative to veteran players. To answer this, a new statistic, Youth Dominance Index, is created. It measures the percentage of strong, dominant seasons produced by younger players. Indeed, there is a negative correlation between the Youth Dominance Index and Win Buying Index, indicating that youth dominance, rather than payroll inequity, has a strong influence on the league and competiveness of teams.
Coaches and analysts can use this information when looking to put a strong team together. As youth is a stronger predictor of winning than payroll, the focus should be more on growing and strengthening young players, rather than paying enormous sums of money to veteran players.
Like everything else there needs to be a balance. A team consisting strictly of young players without any veterans to guide them is not likely to win, so teams must look for the optimal balance between young and veteran players.
Analytic methods used in this research: R-Squared of a Linear Regression, Cross-Sectional Analysis, Win Buying Index, Payroll Inequality Index, Longitudinal Analysis, Youth Dominance Index.
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