RATIONAL EXPECTATIONS AND PRO SPORTS LEAGUES
| Published date | 01 July 2007 |
| DOI | http://doi.org/10.1111/j.1467-9485.2007.00420.x |
| Author | Rodney Fort,James Quirk |
| Date | 01 July 2007 |
RATIONAL EXPECTATIONS AND PRO
SPORTS LEAGUES
Rodney Fort
n
and James Quirk
nn
Abstract
We put a new set of shoes on that old workhorse, the competitive talent market
(CTM) model in sports economics. There exist unique rational expectations
equilibria for both national football league (NFL-type leagues) and major league
baseball (MLB-type leagues) under the CTM model. A cursory statistical test
fails to reject the empirical implications for the NFL-type league. The model also
suggests empirical tests of whether or not talent demand (marginal revenues from
talent), including induced effects, actually slopes down. But like all models, the
competitive talent model should be applied in its context. It describes highly
cooperative North American sports leagues that have a wealth of common
information. But it may not do the same for other leagues if they lack this common
information.
I Intro ductio n
The competitive talent market (CTM) model is an old work horse in sports
economics (El-Hodiri and Quirk, 1971; Quirk and El Hodiri, 1974; Fort and
Quirk, 1995; Vrooman, 1995; recent examples are in Szymanski, 2004;
Szymanski and Kesenne, 2004; Kesenne, 2005). In this paper, we give it a new
pair of shoes. There exist unique rational expectations (RE) equilibria for the
CMT model. We show this for leagues with two distinct revenue functions, one
characterizing national football league (NFL-type leagues), the other major
league baseball (MLB-type leagues), both without and with modern pooled
revenue sharing in each case.
Of course, uniqueness seldom comes for free and our results are no exception.
In general, uniqueness can be proved under the following reasonable assumption
– the direct impact of a team’s talent choice on its own marginal revenue is
greater than the indirect impacts on its marginal revenue associated with or
induced by talent choice responses by other teams. We call this the ‘dominant
direct effects’ assumption. It ends up that this effect is implicitly assumed in all
n
University of Michigan
nn
California Institute of Technology (Retired)
Scottish Journal of Political Economy, Vol. 54, No. 3, July 2007
r2007 The Authors
Journal compilation r2007 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
374
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