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. Calvin says:

    Interesting article that brings up some great points. I do have a few issues with this philosophy, however. This is an incredibly intricate issue, and I don’t pretend to have all the answers, but I feel that there are some major issues involved in paying players. My thoughts and areas of disagreement with the article are listed below:

    1. If you allow programs to set player salaries/stipends, there will be a massive inflation of these amounts over time. We have already seen this with college coaches. I don’t know of a place that has yearly historical data on top coaches salaries, but they have skyrocketed in the last 10 years. We have seen an arms race of sorts with respect to coaching salaries, and player salaries would likely experience a similar trend if not capped at some level. This could be addressed with some sort of tier-based system, but putting a cap on player salaries runs contrary to the idea that college sports should adopt a free-market philosophy. Further, the article doesn’t address the fact that the salaries of most high-profile coaches are paid for through high-level donor contributions specifically intended to fund the coach’s salary. If there is a free market system, donors and boosters would essentially be allowed to bid on and ‘buy’ recruits. College sports may be coming to a crossroads here, but I personally don’t think such a system would be healthy for college sports, and I certainly can’t blame the NCAA for resisting such a change.

    2. I am a huge college sports fan, and (somewhat sadly I admit) follow recruiting very closely. I disagree with the assertion that recruits choose a school based solely on their ability to win. Women’s basketball players for example, probably do chose a school based on their ability to win, but quite frankly high level male athletes have much more at stake in terms of picking a school. I don’t mean to put down women’s athletics in any way, but a lucrative career in professional athletics is far more realistic for male athletes. For many of the highly recruited athletes that shape the top-level competitive landscape, factors such as immediate playing time, exposure, and the ability to distinguish themselves in the eyes of professional scouts are heavily considered when choosing a school. Women’s basketball has leveled out a bit recently, but there was a time during Pat Summit’s stretch of domination that they were getting literally the 5 best players very year. Not 5 of the top 18, but the top 5. Female athletes are going to play for 4 years, because there isn’t a strong financial incentive for them to leave. On the other hand many of the top male athletes hope to stay for 1 or 2 years, before cashing in on the professional option. My point is that at the end of the day, most high-level male athletes (who account for the vast majority of college sports revenues) heavily consider financial factors in choosing a school. This is why we often see top 10 recruits choosing to play at schools like Baylor, Providence, etc. instead of perennial powerhouses such as Kentucky, Kansas, North Carolina, etc.

    3. As an extension of my second point, I disagree with the assertion that a free market system wouldn’t change the competitive landscape. If I am correct that many players choose to attend non-dominant schools based on financial incentives relating to their ability to get drafted, then the introduction of actual cash incentives provided by schools/boosters would change the competitive landscape. For example let’s say that there is a top 10 recruit that wants to go to one of the major schools, but is afraid that he won’t play over the current starter at his position on these teams. Under the current system, he would likely choose to attend a less prestigious school, because he will be able to play immediately and hopefully be noticed by NBA scouts. However if, say Kansas, can offer him $500,000 for a commitment, compared to the $50,000 offered by the smaller school, he is without question more likely to attend Kansas (this doesn’t mean that he will definitely choose Kansas, but it certainly increases the likelihood that he will). I think you would eventually see a situation where every one of the top 30 recruits commits to one of the top 5-8 programs, separating them further from the competition in terms of talent.

    4. Finally I think that saying an Indiana player is only receiving $30,000 in value from the program is completely inaccurate. The ability to play for a college program, particularly one as visible and prestigious as Indiana, adds tremendous value to the player’s position. Indiana is on national TV almost once a week and is covered heavily in the national media. ESPN runs highlights several times a day following a game. NBA scouts are very aware of who the pro prospects are on Indiana’s team, and are able to watch them often. The coaching staff is comprised of some of the best developers of basketball talent in the country (which is worth thousands of dollars alone in my opinion). I have two pretty clear examples that illustrate how valuable playing for a prestigious college program can be. The first involves Brandon Jennings, who is currently playing in the NBA. He was the number 1 recruit in the country out of high school, and according to most would have been one of the top 3 players selected in the NBA draft, if not the first, out of high school. However, the NBA had just changed their draft rules by barring high school players from entering the draft. Unable to qualify for college, Jennings spent a year playing basketball abroad (as a 17 year old kid), where he struggled to even see the floor through the strenuous 9 month season. Concerns over his poor performance during the year abroad caused him to drop to the 10th pick on draft day. NBA rookie salaries are set, based on draft position, and Jennings received a contract worth $2.2 million per year, while the first player selected had a contract slotted at $4.9 million. This isn’t exactly proof that going to college would have made him $2.7 million, but it does illustrate my point that playing in college provides the best possible exposure for a player, as well as an environment that is far more conducive to an 18 year old player’s success than that of living and playing abroad. My second example involves Victor Oladipo, who was the 144th ranked recruit out of high school. This ranking indicates that scouts had very little regard for Oladipo’s pro potential. However, he spent 3 years learning, developing, and playing in Indiana’s system. He broke out this year, and is projected to be a top 5 pick in the NBA draft, which would earn him a contract in the ballpark of $3.5 million. Of course, it can’t be proven that he wouldn’t have developed in the same way at a smaller school, but I think most college basketball experts would agree that the development and exposure he has received at Indiana will earn him millions of dollars.

    Like I said I don’t have all the answers, but I think a middle ground can be found. In a round table discussion featuring Jay Bilas, Bill Self, and other media members in Lawrence a few months ago, an interesting idea was proposed that I am a fan of. I forget whose insight this was (I think it was Bilas), but the idea was put forth that players could be required stay in college for 3 years, but would be eligible to be drafted by the NBA. This system is similar to the NBA’s approach to European players. For example, a team could draft the rights to Nerlens Noel and offer him a contract. He would be allowed to receive at least a portion of his contract immediately, but would be allowed to stay in school and develop/mature as a player and person (to clarify I’m not saying that Noel individually needs to mature as a person, just that college players in general would benefit from a few more years of maturing).

    College sports is coming to an interesting point. The exploding popularity of the once purely amateur college athletic system is forcing us to re-evaluate the role sports should play in the college landscape, and how they should be governed. I’m a Kansas fan, and I love college sports.Maybe I’m just being resilient. Maybe I’m just trying to hold on to the system that has allowed my team to thrive (as a Kansas City sports fan, KU is the only one of my teams that thrives). I do think some change is needed, but I am not a fan of a full-scale free market/pay-for-play system.

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  2. Clint says:

    If you want to put this in perspective, take into account the O’Bannon case. One of the plantiffs, while in college, was a basketball superstar. He went to a sports shop and saw his jersey (jersey number) on sale for around 100$. Since he couldn’t recieve any monetary compensation for his work, he couldn’t afford to buy his own jersey. Pretty messed up system right?

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  3. Samuel Fang says:

    I think one of the biggest hurdles to this proposal would be Title IX restrictions. As Title IX is now interpreted by university and athletic administrations, a female athlete would also need to be paid a higher-than-scholarship wage to the same amount, otherwise the university could be sued under Title IX.

    Now, I think universities are gun shy with respect to Title IX. The actual language allows for equivalent or proportional spending, but universities have worked hard to make it equal spending (even at universities where the men outnumber the women) to avoid messy court cases over “equivalent” or “proportional”. But I don’t think that’s going to change, which will cause this proposal to simply not be adopted.

    I think the proposal is otherwise workable and even laudable, but I don’t see how to get universities over their Title IX fear.

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  4. Jared Thompson says:

    So this is obviously a large issue of interest now and most certainly for the years to come as the universities continue to make more money off of their athletes. While a change is definitely in order, many of the ideas suggested are overboard. There doesn’t need to be a free-market economy or a much larger sum given to the athletes. That being said the athletes do deserve more money and often go much under recognized for their contributions to the university. What I suggest is that they have ruling allowing additional sums to be given to athletes that contribute greatly to the university. This additional scholarship would be given after the athlete has gone and preformed for the university as not to taint the traditional recruiting process but would recognize the athlete for it’s contributions.

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  5. sally says:

    let’s not forget about those colleges that are subsidizing athletics via student fees. why do students have to take on more student loan debt to subsidize their ncaa team? surely they would benefit more from lower debt loads rather than supporting mediocre teams. if college athletics is so important to the ncaa, then they should spend some of that tournament broadcast $$ to support the smaller d1 teams rather than exploiting the students and student athletes,

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  6. Scott P. says:

    If you pay players, universities lose their tax-exempt status as non-profits. They will then pay tax on every dime in revenue, from whatever source, from the athletics program to donations to the scholarship fund to tuition proceeds.

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    • Seminymous Coward says:

      Why do you think paying players would cause universities to lose their tax-exempt status? They pay their other employees.

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  7. M Wade says:

    Facilities costs are not factored into these calculations, nor is the demonstrable improvement in skill level that results from these facilities combined with coaching, conditioning, nutrition, etc. Nor are the federal requirements that colleges and universities offer sport opportunities to all students. These types of zero-sum calculations do not even work in the business world: why are so many paid minimum wage, allowing the CEOs and CFOs to earn two orders of magnitude more? If each minimum wage worker did not bring in many times his/her hourly wage, then the business would not be profitable.

    It would be better if the NBA, like MLB, established a minor league if money brought in during a season is the only criteria on which to base arguments for and against the existence of school teams.

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  8. Ben says:

    I love the proposal. Let’s stop with the hollow NCAA rhetoric about student athletes. Some are, but, please, some aren’t.
    One major hitch is that we have to also acknowledge that a lot of these student athletes who are being used to make money for their schools are also being developed in a fairly cheap minor league system for pros. Pay an athlete all you want, do it above board, keep your receipts. Then when a big league team drafts one of your players they repay you for the “stipend” you provided that player beyond the value of the scholarship.

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