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...Andrew Zimbalist notes, "There always been some degree of competitive imbalance in baseball.... Viewed as business, baseball or any other sport would rather have teams from bigger cities win more frequently than teams from smaller cities." (Zimbalist, 2000, p. 55)
In 1970, Curt Flood sued Major League Baseball (MLB) to become a free agent. (1) Owners supporting the reserve clause, a system that allowed teams to retain a player's rights indefinitely, argued that free agency would lead to league domination by teams with the largest markets, destroying competitive balance.
The owners' argument is directly contradicted by the economic theory proposed by Ronald Coase, which asserts that in the absence of transaction costs and other economic distortions, the bargaining process will produce the same outcome regardless of how property rights are originally allocated. (2) Under the Coasian argument, a player would end up on the team where his marginal revenue product is greatest regardless of the bargaining system--free agency or the reserve clause. (3) The only theoretical difference between free agency and the reserve clause system would be that under free agency players accrue a significantly greater part of their value; rents would transfer from owners to players rather than a change in player allocation.
This discrepancy between economic theory and the claims of owners has provoked my research into the effect of the 1976 Basic Agreement, which brought about free agency, on competitive balance. "The assumption that the market is free of transaction costs and other distorting factors makes the application of the Coase Theorem and the Invariance Proposition to most real world markets [such as Major League Baseball] rather precarious." (Bowen, p. 5) This paper tests the claim that free agency has had no effect on competitive balance. Section II of the paper provides an overview of the previous literature on this topic. Section III examines historical influences on competitive balance and Section IV proposes an empirical model. Section V presents the results of the model drawing on data from 1950-2001, and Section VI offers conclusions about the subject.
Section II: Previous Research
A 1985 article by David Besanko and Daniel Simon addressed the effect of free agency on competitive balance using National League data from 1970-1983 (seven years of pre-free agency [1970-1976] and seven years of post-free agency [1977-1983]). These researchers measured competitive balance using the standard deviation of team winning percentages (with a smaller standard deviation representing a greater degree of competitive balance). This methodology has been the most common measurement of competitive balance in subsequent literature.
Besanko and Simon surprisingly found that standard deviation has decreased (greater" competitive balance) since the Basic Agreement. Besanko and Simon's result, however, was not statistically significant. Based on this observation, Besanko and Simon concluded that free agency has had no significant effect on competitive balance, as suggested by the Coase Theorem. Other researchers, like Christopher Drahozol and Fort and Quirk, expanded on Besanko and Simon's sample...
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