Wednesday, June 9, 2010

Economist's Notebook: Money and Sports Drafts

On the morning after last year's number one pick in baseball, Stephen Strasburg, had a stunning debut for the Naionals...

AP sports writer Jimmy Golen has a nice article that wonders why Major League Baseball does not allow the trading of draft picks as do the NFL and the NBA.  MLBs prohibition doesn't make sense to economists who know that prohibiting voluntary transactions almost always leads to sub-optimal outcomes.  Why not let teams trade draft picks if they think it can make their club stronger?

Steve Levitt mentions this article on the Freakonomics Blog and Economist Richard Thaler is quoted in the article making the same point.

But I wonder why these economists have not mentioned the obvious question: why not monetize the draft?  In fact this is not my idea, it was the idea of a friend of mine from grad school who, before he went to grad school worked as an economic consultant and even got an audience with the NFL to suggest the idea.  Apparently he was not persuasive enough.

The idea is pretty simple: barter economies are much more inefficient than money economies.  If you have a kumquat and would like to consume an orange in a barter economy, you have to find someone who both wants a kumquat and has a orange to offer.  In a money economy you need only to find a buyer for a kumquat and then you can take your money and give it to the holder of an orange.

Trading in sports drafts is the same thing.  If you have the number one draft pick, but prefer, say, three role-players you have to find a team that both wants the number one and has three role-players that you want.

What if instead of getting to pick first, the worst NFL team from last season were given 10,000 "draft bucks," the number two team 8,000, the number three 7,000 and so on.  The absolute amounts are not important, only the relative amounts.  Then on draft day, you hold a big auction - e-bay style - on all players eligible that year.  Teams that value a certain player highly will bid a lot ( and will therefore have less to spend on other players if they win the auction), and teams that don't won't bid at all.

So instead of having the number one pick, you have the most money to spend, but you can spend it exactly as you see fit. It wouldn't have the drama of the draft and nowadays these things are big media events, but it should increase efficiency and improve the level of play in the league.

In fact, according to economic theory, what you should get is Pareto-efficient outcomes, outcomes that capture all of the total surplus available in the market.

What's not to like?


Kari Chisholm said...

(I assume you mean that the worst team would get 10,000 draft bucks.)

For several years now, I've organized a fantasy football league in which the draft is conducted as an auction. (Rather than an eBay-style auction, where every player is bid upon simultaneously, it's a traditional auction, where each auction item, i.e. player, comes up in order.)

It makes for quite a bit more drama, actually, as every team owner has an opportunity to go after every single player. It allows for quite a bit more strategy - and each owner is substantially more satisfied with their picks at the end of draft day.

And, by the way, it's more fun.

Pro sports leagues should most definitely go auction style -- at least for the first round or two or three.

Patrick Emerson said...

Yes, 10,000, thanks for the catch - I have corrected it.

Yes, I guess there is no real reason not to have a sequential auction if you want to make a show of it. said...

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