How About a Free Market for College Athletes?

In 2010, CBS and Turner Broadcasting agreed to pay $10.8 billion to broadcast the NCAA men’s basketball tournament from 2011 to 2024.  As a result of this contract, fans of this tournament can watch these games on four different networks.   And perhaps more importantly (for those of us who work during the day), we can see these games on our computers in our offices.

Certainly all these games make us fans very happy.  And all that money has to make coaches, athletic directors, and other university administrators happy.  But what about the people we are actually watching?  

The people on the court are referred to as student-athletes.  And according to the NCAA rules, these athletes are supposed to be amateurs.  In other words, other than a scholarship, these athletes are not supposed to be paid.

A few days ago, CBS News did a story on whether the labor market the NCAA employs should be changed.  This story focused on a lawsuit filed by former college star Ed O’Bannon, which disputes the NCAA practice of not compensating players for using their likeness in video games.  The discussion, though, quickly turned to the issue of whether or not college players should be paid (more than a scholarship).  As one can see – both in the article and in the four videos included in the story – I tend to think the scholarship is not adequate compensation for many athletes.

To illustrate, consider the Indiana Hoosiers this season. An examination of the player statistics reveals that Victor Oladipo produced 7.37 wins for Indiana (the Wins Produced calculation for college basketball was similar – in fact, amazingly similar — to what has been done for the NBA).   We are working on the economic value of a win in college basketball, but a conservative estimate is that a win is worth at least $100,000 for a program like Indiana.   Given the number of wins Oladipo produced and the conservative value of a win, Oladipo’s production was worth (i.e. his Marginal Revenue Product) about $737,000 (and again, this is a crude and conservative estimate).

The following table reports the same calculation for each player Indiana employed this season. 

Indiana 2012-13

Wins

Produced

Wins Produced

 per 40 minutes

Marginal

 Revenue Product

Victor Oladipo

7.37

0.318

$737,129

Cody Zeller

5.66

0.233

$565,992

Jordan Hulls

4.56

0.189

$456,377

Kevin Ferrell

3.23

0.139

$323,131

Christian Watford

2.92

0.128

$291,740

Will Sheehey

2.42

0.133

$242,386

Remy Abell

1.64

0.160

$164,178

Jeremy Hollowell

0.60

0.082

$60,374

Maurice Creek

0.43

0.094

$42,661

Hanner Mosquera-Perea

0.28

0.105

$28,060

Jeff Howard

0.25

0.278

$24,976

Austin Etherington

0.24

0.208

$24,457

Derek Elston

0.14

0.050

$13,742

Raphael Smith

0.10

0.225

$10,139

Taylor Wayer

0.02

0.086

$2,138

Peter Jurkin

-0.03

-0.165

-$2,879

TOTALS

29.85

 

$2,984,604 

A scholarship to Indiana is valued at less than $30,000.  So at least nine of these players were exploited (which simply means they were paid less than their Marginal Revenue Product).

So should the NCAA re-write the rules so that Oladipo gets paid $737,000?  This is not what I would propose.  Historically, the NCAA has seemed intent on writing as many rules as possible to regulate college sports.  And such rules – not surprisingly – benefit the groups who have the biggest influence on the rule-writing (i.e. university administrators, athletic directors, and coaches). 

What I would propose is stop with the rule writing.  Simply allow each team to compensate its players in whatever fashion necessary to get the athlete to come to campus.  I would suspect that for most athletes, the current system would continue.  In other words, most athletes (across most sports) would simply receive a scholarship to play sports and attend school.

For a few players, though, the situation would be different.  A player like Oladipo generates far more revenue for a college program than his scholarship is worth.  Consequently, in a free market some school would be willing to pay more for Oladipo’s services.  

One might wonder where this money might come from. After all, the NCAA claims that many college sports programs are not profitable.  Such claims, though, seem dubious.  Colleges are generally not-for-profit, and therefore, excess funds tend to get spent (since an owner can’t claim these profits).  With respect to college sports, one obvious place these funds get spent is in the pay of college coaches.  For example, Tom Crean – head coach at Indiana –  was paid $2.24 million in 2011-12.

The salaries paid to NBA coaches are somewhat difficult to find.  But there was a report that Erik Spoelstra – head coach of the world champion Miami Heat – is being paid $2.75 million in 2012-13.   In sum, Crean is being paid a salary that is not much different from an NBA coach.  But NBA teams make far more in revenue than a college team (sports economist Andrew Zimbalist has argued NBA teams earn 10 times more in revenue than a top college team).  So how can Indiana afford Crean’s wage?  Obviously the restrictions on player pay are a big part of this story.

So if we paid more to the players, coaches like Crean would likely get less.  But wouldn’t the fans also suffer?  After all, if the players can be paid, the top teams will simply get all the top talent.   And that would ruin the competitiveness of college basketball.

That would be a great story, if the current system looked very competitive.  But college basketball – under the current system – is hardly competitive. Consider the players Kentucky has been able to recruit in recent years.  For example, four of the top 40 recruits signed with Kentucky in 2012.  In 2011, Kentucky signed four of the top 20 recruits.  And in 2010, Kentucky nabbed four of the top 30 recruits.  In 2013, Kentucky is even more dominant.  So far, Kentucky has commitments from five of the top 18 recruits.  This is the pattern we see without paying the players more than a scholarship (at least, we assume Kentucky isn’t paying anyone more). 

Would Kentucky be able to get even more players if it could pay more than a scholarship? I suspect that the opposite is more likely to be true.  It seems likely that Kentucky recruits this many players because the pay for each is well below free market rates.

And the players go to Kentucky because they suspect – despite the outcomes observed this year – that they have the best chance to win games at Kentucky. In other words, because players can’t choose a college based on compensation, they must sort themselves on some other criteria.  And the big attraction appears to be whether or not the player is likely to win in college.  So when one top player commits to a program, other top players have an incentive to follow.

As a consequence, the NCAA has never been that competitive.  A few years ago economist Jim Peach* looked at the distribution of Final Four teams from 1950 to 2005.  Peach found that 12 teams – out of the more than 300 Division I teams – accounted for 48.7% of all Final Four slots.   So the current system employed by NCAA men’s basketball – with player pay capped at the value of a scholarship – has not led to much competitive balance. 

And if the restriction on pay isn’t promoting balance, why should this system persist?  We already pay students to do other work on college campuses (as I told CBS News, we pay someone to grade my exams).  Why not consider college athletics as just another student job?  Again, for many of these students on campuses around the country, this job is probably not worth more than a college scholarship.  So the current system can stay in place.  But for the players who bring in most of the fans and produce much of the revenue, colleges should be allowed to compensate these student-workers with higher wages.  And such a system would eliminate many of the resources currently spent policing the NCAA system of restricting athlete pay.

Let me close by noting that virtually everyone objecting to the NCAA adopting a free-market approach to college sports, currently works and benefits from a free labor market.  And if these people were told that their wages were capped by a rule their employer created, they would likely object. In much the same way, people should also object to the current system of compensating college athletes. 

Again, it is these people we are watching this weekend.  And if the NCAA adopts a free labor market, more of the revenues our watching is generating will actually go to the people we are watching.

*Peach, Jim. “College athletics, universities, and the NCAA,” The Social Science Journal, 44, (2007): 11-22

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  1. Courtney says:

    Hidden due to low comment rating. Click here to see.

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    • Jonathan says:

      A) Most athletes do not receive benefits from outside groups. Those are impermissible benefits that can get a program shut down if done with willful intent. Yes, boosters do pay some players but it’s done under the table and done without NCAA permission and oversight. The fact that boosters do play some players isn’t an argument against paying athletes legitimately. Regular students can receive gifts from friends and family, athletes cannot. Athletes should, at least, be able to receive gifts openly and free from scrutiny and scorn.

      B) So athletes should not be paid because they are not prepared for college? Why do schools have remedial programs? Many students are unprepared for college. Many students cannot handle college level coursework. The students who cannot are allowed to leave the systems. Athletes are given a list of classes to take and are handed grades for do subpar work. They aren’t allowed the ability to even flunk out of college. They’re shuttled through college so that they can play a game to make money for the school. Many leave college in the same condition they entered. Try taking a full 16-18 hour course load while working a 40 hour/week job that requires weekly travel and little sleep. See how well you perform. Sure, athletes”choose” this life, but how hard is it to choose a chance at a professional sports job versus almost anything else. The very least the NCAA could do would be to allow athletes to major in their sport. They could learn training, diet, and coaching skills that would give them a skill when they graduate. Rather than the degrees they currently get in general studies.

      C) I agree here. The money colleges make from athletics should be used to educate. But the NCAA, coaches, and athletic directors will never allow that to happen. The best solution is to compensate the players beyond a scholarship they aren’t even allowed to use.

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      • Mike B says:

        I would love to see a Mark Cuban type make a public announcement that he will guarantee some amount of money to whatever college player plays for some specific team under some terms. The money would come after the player graduates and there would be no contract, just a verbal pledge. The NCAA can’t hold schools responsible for the actions of private citizens and they can’t punish players for actions taken post graduation. Such an action, if then followed up on over a number of years, would destroy the NCAA’s cartel.

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      • Ja says:

        Agreed. But it’s not. In many cases, those funds find their way into disloyal coaches’ pockets and administrations seeking the next conference money-driven defection. Simply put. These are free minor league systems. Baseball has no such conflict becaus MLB has a viable minor league.

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    • Seminymous Coward says:

      (A) violates NCAA rules and, therefore, shouldn’t be used to reason about how those rules are set. Enforcement is a separate issue from rule-making.

      (B) is an argument for other forms of pay for student-athletes. If they aren’t getting maximum benefit from a scholarship, that makes it a less suitable form of payment.

      Finally, whatever your employer’s main purpose is, Courtney, I’m confident that purpose is not paying you. Therefore, I presume under your point (C) that you’re willing to take a pay cut to a ceiling defined by a cartel of organizations operating in the same industry? This would free more funds for your employer’s main purpose, after all.

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      • Enter your name... says:

        I dunno about the assertions that receiving all “benefits” is a violation of the rules. I’ll bet that the NCAA doesn’t prohibit athletes from receiving free tutoring for classes they miss, and that’s a “benefit” that most students cannot receive without paying for it. All athletes at my non-NCAA school received free laundry services (theoretically, just for practice clothes and uniforms, but the actual rule was “whatever fits”). I’ll bet that the NCAA doesn’t prohibit that benefit, even though all the other students have to not only pay for detergent and coin-op machines, but do the washing, drying, and folding themselves.

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      • Seminymous Coward says:

        My claim only regarded “benefits from outside groups.” My understanding of the rules is fairly superficial, but you can read the full wording at http://www.ncaapublications.com/productdownloads/D113.pdf . That’s specific to Division I, but the other divisions’ manuals are available if you look around the NCAA site. The whole document is 444 pages, but the most relevant parts are Articles 12 & 16. A condensation of the rules regarding boosters (i.e. virtually all potential outside groups) is available at http://www.ncaa.org/wps/wcm/connect/public/NCAA/Enforcement/Resources/Role+of+boosters+in+intercollegiate+athletics .

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  2. Peter says:

    The money generated by D-I Football and Basketball is also used to subsidize all the other NCAA sports, including all the D-II and D-III championships which don’t generate enough revenue to fund themselves.

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    • Jonathan says:

      So close. D-1A football money does not go to the NCAA. It is used, to some extent, to fund Olympic sports. But it’s naive to think that the University of Texas requires $600M+ to run an athletic program. Last time I checked, coaches don’t need more money than university presidents and professors. Or do ADs need huge salaries because its so vital to the mission of the program?

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      • Seminymous Coward says:

        If you want to compare about cost-benefit ratios, university presidents are probably not the best example. Coaches, at the very least, bring in more than they’re paid.

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      • Enter your name... says:

        The “benefit” in the “cost-benefit ratio” for an educational institution is supposed to be how much educational benefit is received by society, not how much revenue is generated.

        On average, first-grade teachers probably win the competition.

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      • Jonathan says:

        Unable to reply inline for whatever reason, Seminymous Coward.

        A major research university president is worth more than the salary paid in most cases. While they may not perform in the lab, they direct the research goals and aims. Presidents and chancellors are the ones acquiring the lab space and supporting grant and funding initiatives. A great president can increase research dollars by a few hundred million while increasing economic impact by a few billion.

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      • Seminymous Coward says:

        To be clear, I do think that university presidents are highly paid and contribute little to educating the students. Here’s the first “osu organization chart” that comes up in Google: http://oregonstate.edu/admin/aa/ir/sites/default/files/orgchart-university-oct-2012.pdf . I think most of the people in that chart and its equivalent at other schools are deadweight overhead. (Compare the other charts at http://oregonstate.edu/admin/aa/ir/org-charts to see that even the administrators aren’t sure who does what under whom.)

        Football coaches may not contribute to academics, but at least they generally don’t divert money from better uses, since almost all generate more money than they’re paid.

        Jonathan:
        I’m not sure in what way you think professors need their research goals directed by a university-wide official. Furthermore, “supporting…funding” is not exactly a concrete work product. I’d be extremely interested in a specific example, though. Perhaps I’m undervaluing some kind of major behind-the-scenes impact.

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      • Jonathan says:

        I thought by using “directing goals” it would seem to imply that I meant that the president was saying what to research and how. Not my aim there.

        I was using my university as an example. Before the previous president arrived NIH funding was decent but not top 10. After her 10 year term the university expanded its impact on the local and stare economy to over $4B annually.

        As far as directing research goals, I meant specifically her focus on young, barely more than post doc researchers who could provide valuable research cheaply and creating spin-off businesses from their work. Her value exceeded her pay.

        Now our football coach’s value can be debated. The football program runs a ~$200k deficit. His salary is around $400k. The athletic department as a whole receives a direct subsidy of $6M to “create” a profit of $400k.

        Every D-1A program receives similar, some smaller and some larger, subsidies from the academic end of the university. Many programs give $1M gifts to the academic end to show how charitable they are.

        The last USA Today study had about %60 of programs running profits. Many whose profit didn’t cover the subsidy.

        You could say that a successful coach increases applications and enrollment, generating more revenue to the university. So essentially my entire argument is a wash. However it was never that presidents and professors should be paid more, rather that athletic departments have room to pay players without running up massive debt or killing off non-profit sports.

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    • Mike B says:

      A better system would be to prohibit direct compensation by schools, but lift all other restrictions on amateur status and payment by outside parties. Basically “boosters” and other sponsors would be the ones to pay for the athletes and universities could continue to spread their revenue around to the other sports. In this way the NCAA would help promote the use of public funds for education, not entertainment.

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  3. Nic V says:

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    • Mike B says:

      Europe needs closed leagues and a strong players union that can negotiate with management with the league’s long term health in mind. North American sports are highly driven by “show me the money”, but also by collective action to improve the sport.

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  4. Brent says:

    I would propose that the simplest way to go about paying players more is to allow Universities to make money off of jerseys, images, etc of the players that play for them. So in this instance, at a University like Indiana, a star player like Zeller would no doubt have many of his pictures/jersey’s sold — and then he could earn royalties off of these items. This would prevent a true “free market”, giving many universities a huge advantage, and would allow revenue from sports like basketball and football to help subsidize non-revenue sports. However, it would also allow a star player to earn incremental income off of his own popularity (and perceived value). Sure, there would be advantages to a star player going to a power school like Kentucky where fans would buy more jerseys, earning him more money, but he’d also have to compete with other star players (ie, a university with only 1 “star” player, even a smaller number of fans there would be more likely to buy mostly the same jersey).

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    • Andrew says:

      Even universities with more than one star player has one player who is the focus. That player will get all the jersey sales while the other players who are helping the team win but not getting the headlines will not. That star player, BTW, might be the ball hog the team who gets the most points but isn’t the best producer.

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  5. Clint says:

    A pareto effecient solution, which would make one party better off without hurting the other, is for the NCAA to adopt the olympic model. The olympic model allows for athletes to get compensated Via marketing (Wheaties Boxes). The olympics don’t pay their athletes, but those athletes with marketability, can use this get get compensation.

    Say if the colleges allow athletes to “sell” their autographs, there is no money being filtered from the athletic budget, and the player recieves the revenue from selling their autograph. Seems like a win – neutral solution.

    Also, the current scholarship system is completley broken and should be re-done. Players can’t even sign a 4 year contract, but they have to sign a 1 year contract 4 times, that has the option to not be renewed, and can not be canceled without a 1 year no compete clause, unless an NCAA waiver has been approved. That is most ludricous thing I have ever seen in labor economics.

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    • Lauren says:

      I like the Olympic model idea. Actually, it was the Jeremy Bloom case that converted me to pro-student-athlete compensation. While universities balance revenue sports and Olympic sports, I do think it’s a fair societal question to ask if football and basketball are so important that we condition young athletes to only pay attention to these? I’d rather see a Missy Franklin collect a check than Peter Jurkin (and I’m even an IU alum!).

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  6. Taylor says:

    Actually, Kentucky nabbed 6 of the top 18 recruits for next season. #BBN

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  7. Mike B says:

    Even if the NCAA doesn’t change it’s only a matter of time before some group of mid-major school that cannot compete under the current system jump off the NCAA ship entirely and start offering $ in a new semi-pro college related league. How many of the best players would choose to play for free vs getting paid right out of the gate? After the NCAA programmes have all of their talent sucked out of them they will be forced to change the rules to compete.

    Another good solution would be for the NCAA to simply create a new division system where schools have a set amount of $ they can spend on their ENTIRE programme, but have a free hand in spending it as they please. This way you can tackle problems of coach salary inflation and facility inflation and player compensation all in one go.

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  8. nol says:

    I can reconcile college coaches being paid almost as much as NBA coaches despite the fact that NBA teams generate more revenue because a college coach plays much larger role than an NBA coach in bringing in talent for their team.

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