10/23/2007

A-Rod Economics

While I don't follow baseball a lot nor do I particularly care for A-Rod I found this blog covering the economic costs of A-Rod to his team. Scott Boras states that his client is worth $30 million a year for the next ten years. His reasoning is that A-Rod brings more people to the stadium to watch the games, and that he increases the viewers on Yankee's YES network. Boras is stating that A-Rod increases the demand for the Yankee's, overall increasing total revenue.

The blog also calculates the economic cost of A-Rod's salary to the Yankee's revenue. Stating that his economic costs are 2.3% of the value of the team. Compared to Barry Bonds (and does not play everyday) who's economic cost to the Giant's is 3.4% of the teams value. In the end A-Rod's economic cost is lower than other high profile player on other teams, and for the Yankee's the new deal would be a bargain.

6 comments:

Logan said...

This is a fun way to analyze one's contribution to a team, especially compared to your peers on other teams. I love the insight that the Yankees should be happy to pay only $30 million because he would be worth the deal at $40 million.

So does that mean that the price is low because demand curve is artificially held back, or because his agent doesn't realize what his client is really worth? It seems that the demand for these high profile players is inelastic since someone must hire them, it is just a matter of who will pay the most.

Dr. Tufte said...

I think it is good to be exploring in this direction, but there are a lot more difficulties with doing this sort of estimation than people guess. Having said that, baseball might be easier than other sports.

The reason is that the marginal benefit a player brings is tough to capture: it clearly depends on the pre-existence of a team, but the composition of that team will make a difference.

Isaac said...

I believe that the Yankees win in this situation paying A-Rod $30 million. The economics behind the deal is interesting and insightful. The lack of knowledge in economics shows why people would look at his contract as asinine. This is to be understood given that they don’t know that A-Rod economic cost is only 2.3% of the value of the team, meanwhile, bringing in enormous profits. Maybe ESPN should touch on the economic value of a player instead of how ridiculous contract prices are getting.

Gavin said...

Extra Credit - Dr. Tufte
The marginal benefits of any player should be measured. It might not be that difficult to capture if an analysis were done. I think that the majority of professional franchises have economists and accountants who generate salary figures from this type of data.

William said...

Dr. Tufte,
It seems to me that there are a lot more variables that must be considered in this situation. For example was there another athlete that added value at the same time that may contribute to this, how is the world doing economically, if the economy is good this might play a factor, and there are many more factors that could come into play. I do though find it interesting that they calculated his marginal benefit and could see some importance to it.

Dr. Tufte said...

Gavin: you'd be surprised how little sports teams actually invest in this sort of thing.

As to accountants, they do have some, but not as many as they need.