FREE AGENCY, COMPETITIVE BALANCE, AND DIMINISHING RETURNS TO PENNANT CONTENTION

E. WOODROW ECKARD [*] This article argues that the 1976 introduction of free agency increased competitive balance in Major League Baseball. The evidence is based on a new empirical measure that captures the key dynamic element of balance: year-to-year fluctuations in team performance. My hypothesis is that diminishing returns to each additional year's "production" of a pennant-contending team reduces the incentive to bid continually for top players. Free agency allows talent to be reallocated more readily to potential new contenders, given that player sales had been restricted prior to 1976. The hypothesis is supported by evidence of declining attendance during contending "streaks." (JEL L83) I. INTRODUCTION Since the inception of free agency in Major League Baseball (MLB) over 20 years ago, its effect on competitive balance has been controversial. For almost a century the "reserve system" had assigned de facto property rights in players' services to MLB teams. This changed after 1976, when veteran players were allowed to unilaterally sell their services to the highest bidder. Team owners predicted a consequent decline in competitive balance, arguing that large market clubs would outbid others for talent and come to dominate. This claim is still made today as the basis for major restructuring proposals, such as new restrictions on player salaries and mobility, team payroll caps, and various cross-subsidization schemes. [1] Economists have examined the issue from both theoretical and empirical angles. Theorists, such as El-Hodiri and Quirk (1971), implicitly agree with the owners that the best players concentrate where their marginal revenue products (MRPs) are the highest, that is, in high-demand cities that also may be the most populous. Debate has revolved instead around Rottenberg's (1956) "invariance" proposition, which states that the distribution of playing talent will be the same under both systems if player sales are unrestricted. Teams where MRPs are the highest purchase the services of the best players, whether from other (low MRP) clubs or directly from the players themselves. Free agency, therefore, should not affect competitive balance. Critics, such as Daly (1992), argue that before 1976 "first-line" players seldom were sold, so the invariance proposition does not apply. Several studies examine empirically the effect of free agency on competitive balance. Taken together, the results are consistent with the invariance proposition, namely, balance did not change. This article argues that these studies use balance measures that ignore a critical aspect of competition, namely, year-to-year changes in a team's position in league standings. Using empirical measures that capture this dynamic, I report new evidence that balance improved after free agency. I then extend the existing theory of sports leagues to explain why free agency might cause such an outcome and provide an independent test of the theory. Specifically, there are diminishing marginal returns to each additional year's "production" of a pennant-contending team, reducing the incentive to bid continually for top players. This allows "also-rans" to obtain the talent necessary to improve their performance and become contenders. I also provide evidence that quality players were seldom sold under the old reserve system, ren dering the invariance proposition moot. The article is organized as follows. The next section reviews the relevant theoretical and empirical literature. Section III describes my measures of competitive balance, and section IV presents empirical results comparing balance in MLB before and after free agency. Section V provides evidence that sales of first-line players were sufficiently rare as to nullify the invariance proposition. Section VI presents the theoretical argument linking free agency to an improvement in balance, followed by a supporting empirical test in section VII. Section VIII summarizes and concludes the article. …