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. Tommy says:

    “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.”

    Dave – interesting article, but I disagree with this statement. Of course athletes want to win, but the main reason that many of the best come to Kentucky is because of John Calipari’s outstanding track record of getting his players from Kentucky drafted into the NBA very quickly. The elite basketball players want the quickest route to the NBA since they are forced to play for one year due to the one-and-done rule, so they’re going to play for the coach that gives them the best opportunity to do that. This actually supports the premise of your article better, anyway. #BBN

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  2. Gary says:

    There is already a D league where players are better and the overall quality of play surpasses that of college. They receive less compensation. The revenue is generated from the name on the uniform and the players are a tiny ingredient. In any given year there are maybe 5 players at most who are attracting attention greater than the school.

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  3. Ed C says:

    I just read an article on Marketwatch.com that lends me to believe that it would perhaps be prudent to view NCAA basketball as a legit way to obtain a degree that otherwise would not have been attainable to people due to financial constraints, academic performance, or simply a systematic lack of opportunity being made available to obtain a generally competitive secondary school education.

    Only as a way to make the point, and assuming that economic opportunities available to African-American families in regards to their children’s education are in a strictly free-market sense going to be less than those of Caucasian families as a whole, the numbers indicate how this perception is fostered.

    The article (http://www.marketwatch.com/story/10-things-ncaa-basketball-wont-tell-you-2013-03-22?pagenumber=6) actually tries to make the point that there is a racially associated graduation gaps that persists due to only 65% of African-American Men that play in the NCAAB graduate vs. 90% of “white” Men, but overall the number is 70%. A quick run of the numbers shows that this data also shows that there are around 4 African-Americans for each Caucasian playing NCAAB.

    If one considers the 2009 US estimated demographics (not the most recent data, but the most recent I could find quickly and theoretically the data that describes the graduating class of 2013 as they entered university), the ratio of Caucasian males to African-American males is around 6.4 to 1.

    (I have no numbers that can be used to adjust for the relative sizes of the under 18 age groups, so the following is indicative at best) This means that as an African-American male you are 25.6 (=4×6.4) times more likely to obtain a degree by focusing on basketball as a means to get a college education than it is as a Caucasian male. This is I am sure not lost on a lot of people, and in itself would be put into jeopardy but making the system a free market system.

    Of course this is all about perception, because a few players with the high profile, successful teams are likely thinking that they have a chance at the NBA, and real money. But, the majority must realize that the real prize should be the degree.

    The shear numbers of player slots available in NCAAB is such a small number (2000?? guess) that this perception has a double edge: opportunity is generally better for male African-American basketball players over their Caucasian teammates, but this opportunity advantage is available for very few people.

    For everyone else, another sport, a non-strictly academic performance based scholarship, or strictly academic success in an education system of reasonable quality if made available, are the ways that most people can get into school to earn a university degree. Until this is the case across the US, programs like NCAA athletics need to have academic standards and provide opportunities to learn and graduate, without the free market taking over and reducing the league to another professional sport.

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  4. NY says:

    A proposal like this is great in a vacuum. Unfortunately, you cannot simply ignore the legal consequences of a pay-for-play proposal.

    For starters, you are going to have a huge Title IX problem with a scheme like this. If you decide to give more money to players on the mens basketball team, you better allocate an equal amount of money for the women in the athletic program. Or would you rather cut a bunch of mens teams and scholarships?

    Next, your compensation is going to take the amateurism out of the game and begin to make this look like a commercial venture. The result of this is the risk that college players will be viewed as employees. You do not want this! If they are employees, suddenly schools will have to pay for workers compensation insurance, might be liable for vicarious liability of athletes on the field, and athletes will then receive the right to form a union under the NLRA.

    There is not enough room for a real discussion on these issues, but just know that proposals like this are not simple; nobody seems to understand the legal hurdles.

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    • Mike B says:

      If there are Title XI issues then spin revenue sports off into a non-academic for profit venture and include in player compensation packages some number of free years of school per season played that can be redeemed at any time.

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  5. Ja says:

    NY, you make some valid points especially the legalities. However, where you are wrong on asserting that the pay-for-play model would remove amateurism. It’s already gone. That’s why the Ivy League-the best, original, sports conference got out of major college sports…it saw what is was going to become. And they were right. For profit sports being run by schools. Not good.

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    • NY says:

      Hey Ja,

      I agree that this is already big business. I think, however, that there are some circles that believe amateurism still exists (not you, not me). So let’s just split the difference and call it a veneer of amateurism. That is, by giving athletes “scholarships,” colleges make a last ditch effort to keep things amateur. But, once we add “compensation” on top (i.e. non-scholarship money), all ounce of amateurism goes completely out the window.

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  6. Hayes says:

    What about all those other school? Heck what about all those other sports? If the NBA wanted a professional minor league system they would create one, like baseball has. Till then get your education first and hope basketball pays off.

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  7. Ja says:

    Hayes, minor league will never happen. NCAA and NBA and NFL are in cahoots-mutually beneficial, exploitative setup that overly benefits the coaches and admins over the people who generate the revenue. I theoretically get your point, but theory ain’t reality. The reality is that cfb and Cbb have evolved into heavily for-profit, semi-professional entities and they should be treated as such. And if not, then they definitely need to scrap the age limit (a clear case of collusion between the nba and its unofficial minor league-why create one if college provides it to you fit free?). It would be better for all parties involved-itd yield more genuine student athletes like baseball (if you wanna do homework and play sports and get a degree, you have that option…if you wanna join the army, try at a sport for a honest wage at the age of 17/18…you should have that right too. It’d eliminate this convergence of school/grades/violations and sports/money. The line would be clearly drawn. But no, the nba and NFL like it just the way it is…offer an education (that is no longer guaranteed for four years by the way, ie if you fail in classroom or coach wants to use it on another hotshot recruit after a couple of years-making it clear that your education ain’t the priority) that pales in comparison to the sports money generated by jocks and not have to invest in a full-fledged minor league system. It will change. The system was originally well-intended but is now broken. And the government and upcoming court decisions will drive that for better and/or for worse. The days of scholastic athletics in the major sports (excluding baseball) are long gone and will be addressed. Side note: someone explain to me how the head if the NCAA (which somehow is a non-profit) makes way more than the head of larger and more impactful non-profits like the united way? Don’t worry…I’ll wait (lol).

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  8. Ja says:

    NY, but why fake amateurish. Then the very questionable (they so play favorites) NCAA oversight looking into so-called improprieties would not even need to exist. Kinda like the bogus war on drugs. We know schools are compromising academic standards significantly, aren’t committed to educate many of these kids (who have been poorly guided and are often ill-prepared to complete degree work in the first place), paying these kids sometimes through “other channels,” yet they pass off this charade to hide behind amateurism when it’s not that. I’m like c’mon, “we’re not that naive!”

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