Wednesday, August 31, 2011

NFL Rookie Salary Cap

By Tim Cole and Lewis Sage


The new NFL collective bargaining agreement effectively imposes a ceiling on the amount of money that teams can pay for early round draft picks, starting in the 2011 season.  The obvious immediate impact is an increase in owners’ profits, the difference between the dollar cap and the (presumably higher) equilibrium contract.  But there are likely to be some unanticipated side effects.

To understand why, remember that teams generally pay for rookies with two coins, only one of which is the player’s contract.  The other is the value of the draft position itself.  Using this past year’s draft as an example, when the Carolina Panthers signed Cam Newton for $22,000,000, they also invested the 1st overall pick in the deal (Kadar, 2011).  And that pick had what economists call opportunity cost – the value of the later picks for which the first overall choice could have been traded.  So here’s what we’re arguing: when the amount of money a team needs to commit to an early draft pick’s contract goes down, the value of that draft pick, as a position in the draft order, goes up.  Which means that teams will part with more and better draft picks in order to trade up on draft day.  

We repeat, because teams will pay fewer contract dollars to sign a first-round choice, they will trade more (and perhaps better) later picks to move up.

And this will lead to the an unanticipated side effect.  Because draft picks have value only if the player signs a contract, the increase in demand for later picks – if only for trading purposes – will likely translate to larger contracts for late-round players as compared to previous seasons.  Couple this with the fact that the rookie cap frees up money, and the total effect could easily be to shift payroll from the elite to the journeyman.

Whether it increases ownership’s profits remains to be seen.

_____________________________________________________________
Kadar, D. (2011, July 30). Rookie wage scale hits 2011 draftees hard. Retrieved August 30, 2011, from www.mockingthedraft.com: http://www.mockingthedraft.com/2011/7/30/2305689/rookie-wage-scale-hits-2011-draftees-hard




Dr. Lewis C. Sage likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sports Management and Psychology. E-mail: lsage@bw.edu

1 comment:

  1. The accessible actual appulse is an access in owners’ profits, the aberration amid the dollar cap and the calm contract.

    Mens Hats

    ReplyDelete

Baldwin Wallace University

My Photo
This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.