Three questions with Richard Sheehan, banking and sports economics expert
Published: July 15, 2015 / Author: William Gilroy
Richard Sheehan is a professor of finance who conducts research on banking and the economics of sports. He is the author of “Keeping Score: The Economics of Big-Time Sports.”
How would you describe your research?
In terms of research in sports, the key issue is applying economics to understand and explain the business decisions that players and executives regularly make. The conventional approach to sports treats it as entertainment, but that approach does a poor job at explaining why players and franchises and leagues make the decisions they do. When you ask fundamental questions that underlie who wins and loses — questions like, “Why did FIFA re-elect Seth Blatter?” or “Why did DeAndre Jordan re-sign with the Clippers?” or “Why is Nick Saban coaching at Alabama?” — the answers are most frequently based on economic factors. With FIFA, the one-country-one-vote model gives the president of FIFA an incentive to spread funds around to small countries and effectively buy their votes while basically ignoring large countries, because there are a lot of small countries — and votes — and few large countries, even though the large countries generate the funds that keep FIFA running. Jordan re-signed with the Clippers because under the rules of the NBA they could offer him more money, although he may be a better fit there as well. Players will sometimes accept a reduced salary for the chance of a championship, but that decision typically comes late in a player’s career when they are already financially secure. And Saban is coaching at Alabama and making about $7 million per year, basically at a minor league franchise relative to the NFL, because he is a good coach, a great recruiter, AND because college players do not receive a salary. Simply stated, if college football players were paid their market salaries, college football coaches would be paid dramatically less and the college football landscape would look dramatically different.
Bottom line in terms of research on sports? Economic incentives largely determine who plays where, who gets paid how much, and ultimately has a major impact on who wins and loses.
How did you become interested in this area of research?
I suspect that sports interests many economists from a business perspective because there is so much data available on the business of sports that is unavailable for the typical business. The first question that I asked in terms of the economics of sports, over 20 years ago now, was prompted while waiting in traffic after a Friday night Notre Dame pep rally. The question: If Notre Dame’s football program could be “spun off” as a separate entity, what would it be worth compared to, say, the Yankees or the Cowboys? The answer is that the most valuable collegiate sports franchises, e.g., the football programs of Texas or Alabama or Michigan or Notre Dame, don’t quite match the value of the Cowboys or the Patriots, but they are close in value to a mid-level NFL franchise.
How do you carry out your research?
You need an interesting question with data that will allow you to address an issue that hopefully has applications and implications well beyond the world of sports. For example, most of us regularly hire agents, albeit we don’t call them that. Those agents may be a baby-sitter, a lawn service or an accountant or lawyer. How do we know that our agent is any better than the average agent in that field? We may have word-of-mouth and we can observe the agent’s performance for us. But we generally do not have information on the performance of other agents, e.g., other baby-sitters or other lawyers. Basically, people are looking for information on possible agents, but the process of gathering that information is very difficult because typically each person will have only a tiny bit of information on the universe of possible agents. A similar situation exists in sports. Virtually every MLB player contracts with an agent to negotiate his contract for him. Some agents like Scott Boras are notorious for difficult negotiations, while many work in obscurity. With agents for MLB players, however, we have a ready metric to measure their success: How well are their clients paid? Since baseball players’ salaries and performance are public, it is a straightforward econometric exercise to determine how performance impacts pay, and to then determine whether some agents can effectively “show me the money” and deliver a contract better than the typical agent. While sports agents may not have very good reputations, most players appear to believe that their agent is better than the average and performs well for them. The evidence, however, suggests that even the apparent super-agents cannot deliver above-average performance. The implications for you? Your baby-sitter or lawyer or plumber probably delivers only an average value as well.