In their recent bestselling book, Berri and Schmidt (2010, p. 13–14) argue that in most US major leagues the variation in team wage bills can explain only a rather small fraction (less than 10 percent) of the variation in wins. Using data from the National Basketball Association and in the National Football League, they conclude that ‘simple statistical analysis demonstrates that it takes more than money to find success in sports’. The reasons for such a weak pay–performance relationship can, of course, be manifold. First, player performance may be difficult to predict (managers make mistakes when assessing talent before signing them to long-term contracts) and, second, talented players may not be willing to cooperate with other equally talented players (envy is said to reduce cooperative behavior if teammates are known to earn higher salaries). Third, and perhaps most important, institutional restrictions on player mobility, such as salary caps, luxury taxes, draft and free agency rules, may create a monopsonistic labor market destroying the relationship between wage bills and on-field performance in professional team sports (see, for example, Simmons and Forrest, 2004).
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