Following up on my post from Monday, things could be very interesting in the NFL next season, from a sport finance perspective. A new collective bargaining agreement (CBA) between the league and the NFL Players Association, the players union, was signed in 2006. This CBA was scheduled to run through 2012, but there was a re-opening clause that was exercised by the league last year. The terms of the 2006 CBA includes a clause that the final year of the agreement will be played with no salary cap. The intent of this clause was to encourage the sides to agree to a new CBA before the old one ran out, since an uncapped year will have uncertain effects on both players and owners. This added uncertainty can be avoided by signing a new CBA before the old one expires, avoiding a work stoppage. Mark Maske has a nice article in the Washington Post about the events surrounding the NFL’s CBA next season.
It now appears that a new CBA will not be signed any time soon, so the 2010 NFL season will proceed without a salary cap. Note that the NFL salary “cap” is actually a salary “band” because it contains a minimum player payroll of $111 million per team in addition to the “capped” maximum. Both will be eliminated in March 2010, so teams can either sign free agents willy-nilly or shed players to their hearts content (this is relatively easy to do in the NFL where most salary is not guaranteed.) Economic theory tells us that teams will increase or decrease their payroll if it increases their profitability; more wins do not automatically translate to more profit – it depends on the marginal cost of an additional win and the marginal benefit of an additional win for each team. There is no reason to expect that every team would increase profits by adding talent and increasing payroll, especially since the largest source of revenues in the NFL, money from the huge national television contracts, is the same for each team no matter how many games they win.
There is no simple way to predict what the effect of the elimination of the salary cap will have on team performance. Rottenberg’s “Invariance Principle” predicts that on-field outcomes in professional sports leagues are not affected by changes in property rights like salary caps or reverse-entry drafts. If the Invariance Principle applies here, then the on-field outcomes in the NFL next season will not be affected by the lack of a salary cap. However, empirical support for the Invariance Principle is spotty, so we have little theoretical guidance to tell us what might happen.