When it comes to economics, sometimes it’s best to check your intuitions at the door.
Especially when the dismal science is applied to professional hockey.
Take the concept of revenue sharing, which one might naturally assume to be a boon for player salaries given the money redistributed from the haves to the have-nots allows teams to compete for talent.
Well, not so fast.
According to University of Michigan economics professor Rodney Fort, generosity and cross-subsidization among owners isn’t exactly a soft form of communism, in fact, it’s a way to put a drag on player revenues.
“What basic economic theory tells us about revenue sharing is that it doesn’t change relative value on the margin,” Fort said in an interview. “Eventually it drives player pay down, ultimately their revenue is the source of the sharing. It’s surprising to me that the NHL doesn’t want more of it.”
Indeed, the NHL is something of an outlier among major professional sports leagues – the NFL, NBA and Major League Baseball all share revenue on a far larger scale.
The NHL owners might want to revisit that at the bargaining table.
What Fort and co-author James Quirk concluded in an oft-cited 1995 journal article is, essentially, when revenue is shared among teams it results in higher league-wide profits.
And, it appears, the money diverted to low-revenue teams isn’t automatically reinvested in players.
In fact the opposite is often true.
Sports franchises are businesses, after all, and businesses exist to maximize profits.
As University of Florida economist Roger Blair wrote in his 2011 book Sports Economics, “just because a team can afford to do something is no reason for a team to actually do it.”
In a salary cap system that’s awash in shared revenues, there’s also less of an incentive to enter into bidding wars for free agents.
Simon writes that while revenue sharing can improve competitive balance, it also removes the financial incentive to win.
If a team’s revenues are propped up by revenue sharing, why spend the extra money to field a strong team?
Fort points out it’s exceedingly unlikely the NHL’s owners don’t understand the economic theory, which makes it all the more puzzling that they wouldn’t jump on board the sharing bandwagon.
But there is an alternative explanation.
“Sports franchise owners tend to be politically conservative people, and [revenue sharing] flies in the face of pre-conceived notions, it has the taint of socialism,” Fort said.
But if greater revenue sharing isn’t in the players’ interest, why is the NHLPA’s opening position in the ongoing stalemate with the league built around creating an “industry growth fund” – a $100-million shared pot to help out the lower-revenue teams?
The NHLPA, which has an economist on its staff, would doubtless argue that rising tides lift all boats, but there’s also a more practical answer: a more generous revenue-sharing system effectively protects current player salaries in the short term.
Even if it comes at the cost of a smaller percentage share of revenues in later years, which the players’ union has already indicated it is willing to accept.
And it’s fairly evident from discussions with players that the main thing they want to avoid in this negotiation is to give back even one dollar of the money that is owed to them this season.
The other aspect is that even though you buy the argument that salaries don’t rise as quickly in a revenue-sharing salary cap environment as they otherwise would in a freer market, the recent evidence points elsewhere.
As University of Ottawa sports business professor Norman O’Reilly said in an interview, “It’s tricky to argue against the facts on the ground – salaries have gone up pretty substantially in the cap era.”
Which, come to think of it, is another counter-intuitive outcome.