Friday, August 30, 2013

Pay and Performance

One of the topics that I talk about in sports economics is the strength of the relationship between payroll and performance.  Many people will give me examples of teams that spend a lot of money and perform well (i.e. the New York Yankees) and here is an example of a team (the Houston Astros) that does not spend much (relative to the rest of the league) and is performing poorly.

Yet, if we take all the teams in MLB, we will find that while there is a positive and statistically significant relationship between relative payroll and performance, the amount of that relationship is limited - typically around 20% over a five year time period; meaning that there is 80% of performance that is not explained by payroll.

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