Baseball’s Revenue Sharing Fails in Theory and in Practice

The logic behind revenue-sharing programs is easy to follow. In a post-free-agency world, team payroll is a huge predictor of team success, but budgets are limited by things outside of a team’s control, like market size and stadium situations. Revenue sharing, then, allows those teams who can’t match up financially with the big boys to keep their payrolls increasing and stay competitive on the field. But what often happens, most notably with the Pirates and the Marlins, is non-competitive teams use their revenue-sharing windfalls to subsidize consistently awful teams.

The Pirates pocketed $69 million in revenue sharing and made $29 million in profits as they lost 189 games between 2007 and 2008. The Marlins reportedly made $300 million in revenue-sharing checks from 2002 through 2010. When faced with a formal grievance from the MLB Players Association, the club agreed to put all revenue-sharing money towards player salaries and development. Shortly after the end of the 2012 season, when the agreement expired, the Marlins promptly traded away all but one player on their roster making more than $1.6 million (the lone exception, Ricky Nolasco, was gone before the trade deadline).

Part of this is because Major League Baseball teams are run by snakes like Jeffrey Loria and Bob Nutting, of course. But part of it is a structural problem with the way baseball’s revenue-sharing program is designed, to the point where it actively incentivizes failure. Instead of creating a rising tide that lifts all boats, revenue sharing has instead acted to make teams into spendthrifts regardless of where they fall on the revenue spectrum.

The problem comes from the system’s use of actual revenues to calculate who pays in and who gets a payout from the system rather than a measure of potential revenues — something akin to market size that accounts for structural differences in team revenue rather than rewarding a team that is simply failing to earn because it is poorly run. The best illustration of the absurdity this system can produce is the 2005 revenue sharing numbers, in which the Philadelphia Phillies — in the fourth-biggest media market in the league and the largest market without a second team — were paid out $5.8 million.

(If you’re interested in deeper proof of this concept, William Colby, an Amherst graduate who has also worked in the Rays front office, published a paper in 2011 analyzing the actual impacts of Major League Baseball’s revenue-sharing programs. It attacks the problem from both a theoretical and empirical angle to prove MLB’s program creates disincentives for teams to spend and actually increases competitive imbalances.)

By creating a system in which increasing revenues by buying talent and winning games actually reduces profit margins, Major League Baseball instead created a disincentive to spend. I have a hard time believing this was an accident, considering the recent changes made to the draft and the international talent market. The institution of hard slotting in the draft and spending limits in the international market act the exact same way, levying huge penalties on every dollar spent over the limits in both cases.

This has made it tougher for teams like the Brewers to dive into the international market or gamble in the draft. But the Yankees? Assigned a $2.2 million cap on international spending in 2014, they went out and spent nearly seven times that, $14.4 million. The $12.31 million in taxes levied on the Yankees as a result would be anathema to most teams, but to the Yankees and their structural advantages, it’s a pittance.

The result is the exact opposite of what these programs are supposedly trying to accomplish. Instead of creating a more competitive game in which teams aren’t limited by structural disadvantages, teams are economically encouraged to lose as cheaply as possible and reap the rewards of revenue sharing until a short competitive window emerges as a result of their many years of top draft picks.

It might sound counterintuitive, but that’s mostly because we’ve been inundated with Bud Selig’s small-market idealism for some three decades now. It was easy to sell because it was what we all wanted to hear — that our teams weren’t losing because they were incompetent, but because the odds were stacked against them. As nice as the logic sounds, though, it has proven to be broken both in theory and in practice.

Related Articles

Leave a comment