Chris Paul and the Rottenberg Invariance Principle

Chris Paul was said to be traded to the Los Angeles Lakers from the New Orleans Hornets earlier today, then just tonight the deal was cancelled by the NBA.  This was done, because the NBA is currently the owners of the Hornets as they are currently searching for an owner to take over the franchise and keep them in New Orleans.  A lot of questions are being raised about why the trade was cancelled, some are saying that it was a big market team (the Lakers) leveraging a small market team (the Hornets).

I see it more of being Rottenberg’s Invariance Principle (which I have discussed on this blog before), which notes that players tend go to the team that values them the most, as long as there are not certain constraints.  In this case, the NBA stands out as a constraint that is preventing Chris Paul from going to a team that seems to value him more at the moment.  Of course, the fingers are all pointing at NBA commissioner David Stern, who has been a bit of a bad guy with the whole deal about the lockout, and now this.

Pundits, the media, fans, and even owners often talk about the big market teams raiding small market teams for players, but some would say that this is just the Invariance Principle in effect.

NASSM 2011 Conference

Greetings from London, Ontario in Canada.  I am attending the North American Society for Sport Management (NASSM) conference along with co-blogger Brian Soebbing of the University of Alberta.  There has been a lot of talk of competitive balance and uncertainty of outcome in many of the talks, including one given by Brian, myself, and Dr. Humphreys (another one of the IJSF bloggers) about the effects of competitive balance on MLB attendance.  It was good to see a wide focus of sport management talks, and how well sport finance and sports economics were represented.  In the final talk given during the Earle Ziegler award ceremony, there was mention of the seminal work of Simon Rottenberg (1956), as well citation of Humphreys’ (2002) work on competitive balance.

In fact, there were so many talks that directly related back to Rottenberg’s 1956 piece, that some of us noted that they could have formed one or two symposiums focused just on the work of Rottenberg.  I think this is telling of the power of the Uncertainty of Outcome Hypothesis (UOH) which was first noted by Rottenberg (1956) and was also discussed by Neale (1964), as well as the Invariance Principle which can also be found in Rottenberg’s seminal work.

Next up will be the Western Economic Association International conference at the end of June 2011, where there will be many sessions focused on sports economics.

 

On a side note, I’ll be traveling to China, and will try to blog while I am there visiting various sport sites and organizations in Beijing.  I’m hoping to take some nice pictures and give an interesting perspective of sport finance as it relates to China.

The NFL Lockout and Rottenberg’s Invariance Principle

The NFL in its opening brief argued that Judge Nelson’s ending of the lockout a few weeks back caused harm to the NFL, by making it so that better off (in the financial sense) teams could sign better players, and that would harm the league by causing a decline in competitive balance.  The argument follows that a decline in competitive balance of talent in the league, would lead to greater disparity between the teams on the field, and thus make the outcome of games easier to predict for fans.  If fans can predict the games then they are less likely to go, and this would mean less gate revenue for teams.  Back in 1956, University of Chicago economist Simon Rottenberg wrote what is to this day one of the seminal works of sports economics and the understanding of competitive balance and uncertainty of outcome in professional sports.  In this Rottenberg hypothesized that games with uncertain outcomes are more likely to be viewed by fans.  This hypothesis came to be known as the “Uncertainty of Outcome Hypothesis” (UOH) and was the first step towards research in competitive balance.

In additional to the UOH, Rottenberg also posited the “Invariance Principle.”  In simple terms, the Invariance Principle basically noted that player talent in a league would move to the team which valued them the most, invariant of team revenues.  That is, players will eventually end up on the team where they have the highest value of use to that franchise.  This is somewhat similar to the Coase Theorem, developed by fellow U of C economist Ronald Coase in 1960.  The NFL’s most recent argument states that player movement caused by the lifting of the lockout caused harm because of a decline in competitive balance because players go to teams that have the most revenue.  The Rottenberg Invariance Principle would note that these players would probably have ended up on teams that valued them the most, and that this ruling by Judge Nelson probably would not cause a change in competitive balance, and in turn cause a change in revenue distribution among teams in a league.

The longer legal brief can be found here.