from Amazon
Monday, August 23, 2010
The Producers
Kristi asks:
So, what do you think about the information that has come to light with regards to the Pirates? Are you mad? Do you think MLB should find a way to keep owners of losing teams from making money? Is revenue sharing a mistake?
What came to mind when I read that was The Producers:
Max begs Leo to cook the books. `Look at me,` he pleads. Once the King of Broadway, now reduced to romancing little old ladies to back him and wearing cardboard belts. Leo reluctantly agrees and returns to Max`s books. After some calculations, he realizes that `under the right circumstances, a producer could actually make more money with a flop than he can with a hit.` Max sits up, an idea forming in his unscrupulous head.
Leo explains. The IRS isn`t interested in a show that flopped, so a producer could raise a million dollars, put on a $100,000 flop and keep the rest. Max proposes the ultimate scheme: `Step 1: We find the worst play ever written. Step 2: We hire the worst director in town. Step 3: We raise two million dollars...One for me, one for you. There`s a lot of little old ladies out there! Step 4: We hire the worst actors in New York and open on Broadway and before you can say Step 5, we close on Broadway, take our two million and go to Rio.`
This is not to say that the Expos and Pirates and Royals and Marlins have intentionally done anything underhanded.
But clearly there is an opposite-sweet-spot effect, where at some level of revenue (I’ll just make up a number and say 80% to 90% of median), where each increase in revenue dollar does not increase in profit whatsoever. That is, the cost it takes you to go from 80% to 90% in revenue also has the opportunity cost of decreased revenue tax receipts. So, either you spend yourself up from really low to low, or you spend yourself up from almost average to average.
On the flip-side there might be another sweet spot, say from 110 to 120% of median revenue, where it’s not worth it to increase your payroll. Because while every dollar spent might give you a decent ROI under normal circumstances, you getting too high up the revenue chain means you’ve got a revenue tax bill to pay the smaller teams.
Where those actual threshholds are, I’ll leave it to the aspiring among you to figure out.
I don’t know where the sweet spot is, but this reminds me of one the feedback effect that baseball’s dearth of playoff spots generates. Assuming there’s a substantial difference in revenue between just missing the playoffs and just making it, the fact that only 26.7% of MLB teams make the postseason has a depressing effect on the amount that any team will spend.
It takes money to make money, and to make the playoffs, but of course every investment is a gamble. In a league where only 26.7% of the teams move on, this gamble is substantially less attractive than in a league where 37.5% (NFL) or 53.3% (NHL, NBA) of the teams do. Even controlling for the differences in the “ante” and “payoff” in each league, the fact that twice as many teams move on in Hockey and Basketball than in Baseball surely reduces the incentive to over-spend and get over the playoff hump.
As an aside, this also throws a wrench into any basic OLS regression comparing payroll to wins. If there is a real feedback effect, this implies that the model should also control for a relationship between winning at time t and spending at time t+1.