Why are Salary Caps Bad?

A commenters asks me why salary caps are bad and won’t work, citing good outcomes in the NFL.  Now I’m not an expert on the NFL by any stretch of the imagination and so others can correct me if I’m wrong, but I believe that it is the multitude of other organisational differences between the Premier League in England (EPL in North American parlance) that generate the difference in competitive outcomes.

Why do I assert this?  Because simple economics shows that arbitrary constraints on the market mechanism such as salary caps, or rent controls, will have adverse affects because they distort the incentives the price mechanism produces to achieve an efficient allocation of resources.

Players generate marginal benefits to the sports teams they play for – better players generate bigger benefits.  If sports teams are restricted to pay at most x for players, then what happens for players that contribute a larger benefit than the player who the market values at x (likely your average player)?  The top clubs will want these players, but only being able to pay x, they will find other ways to attract that player to their team.

In rugby league’s Super League, methods used include paying the wives/girlfriends of players to “work” behind the club bar, or in the club shop, for an hour a month, and paying a somewhat large hourly rate.  I’m sure there are plenty of stories in North American sports leagues.

If you’re happy with these alternative methods, then that’s fine.  But I think when the clamour is towards greater financial transparency in sports, especially in English football after the scandal at Portsmouth last season, introducing new regulations that give incentives to clubs to disguise their actions is not wise.

Furthermore, due to these forces, the upshot of salary capping is not that talent is more evenly spread over a sports league.  There are other methods – I’ve long favoured capping squad sizes personally, without much empirical evidence that I know of.  I’m thus quite excited by the squad limits being introduced this season in the Premiership.

With Craig Bellamy, one of the Premiership’s best performers last season, moving to Cardiff this week on loan based on the likelihood he wouldn’t make the 25-man squad at Man City (who are buying right, left and centre), we are perhaps beginning to see the impact of such regulations on dispersing quality more evenly throughout the Premiership – and even the leagues in this case – Cardiff are in the Championship (the division below the Premiership).

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