Professional sport leagues' payroll mechanisms and their effect on competitive balance

The purpose of the study was to analyze the effects of team payroll mechanisms on competitive balance in the four major professional sports including Major League Baseball (MLB), the National Basketball Association (NBA), the National Football League (NFL), and the National Hockey League (NHL). In analyzing these effects, the purpose was (1) to understand the differences between the payroll mechanisms of each sport, (2) to determine the effects of each payroll mechanism on the competitive balance of the respective league, and (3) to describe which aspects of each payroll mechanism impact the measured competitive balance of the leagues. To analyze the measures of competitive balance, secondary data of team winning percentages was compiled. These values were broken down into categories based on the implementation of various team payroll mechanisms in each sport, including the addition of a soft salary cap and luxury tax in the NBA, hard salary caps in the NFL and NHL,and a luxury tax and enhanced revenue sharing plan in the MLB. Competitive balance was measured on both an intra-seasonal and inter-seasonal basis. Intra-seasonal competitive balance is the degree of equality of the teams in a league during a given season. This was measured by the average ratio of the actual standard deviation in a given season and the ideal standard deviation based on the Central Limit Theorem. Inter-seasonal competitive balance is the degree of uncertainty across seasons as to the playing strength of teams in a given league. This was measured by the average change from season to season in winning percentage of the teams in each league. Statistically significant changes in competitive balance were shown on an intra-seasonal level across multiple leagues based on the type of payroll mechanism implemented. The introduction of the soft salary cap in the NBA caused a significant drop in intra-seasonal competitive balance, where as hard salary caps in the NFL and NHL maintained the levels of competitive balance from before implementation. Luxury taxes in both the NBA and MLB showed improvements in intra-seasonal competitive balance as well. Inter-seasonal measures of competitive balance were not shown to be significantly affected by any payroll mechanism. While this study focused purely on the effect of payroll mechanisms, further research would prove helpful taking into account the effects of other factors such as team relocation, league expansion, and economic downturns in conjunction with these mechanisms. Also, as a number of these payroll mechanisms were introduced recently to their respective leagues, a larger set of post implementation data could provide more meaningful results.