Thursday, April 22, 2010

Reforming the NFL Draft

Well, tonight kicks off the NFL Draft. Football fans always get excited this time of year to see who their team will be adding to the roster. Of course, the draft can be very frustrating for NFL teams, as they have to spend a great deal of money on players at the top of the draft with a substantial likelihood that the player will not work out. What, though, does the NFL draft have to do with business (other than the obvious fact that the NFL is big business)? Let's turn to today's Wall Street Journal to find out.

In today's WSJ, Reed Albergotti writes about how economists believe they could design a much more effective system for allocating college players to professional teams. In fact, a number of economists have deep expertise helping to design programs such as those that match medical school graduates with hospital residencies. These programs work quite effectively. Alvin Roth, one of the preeminent scholars in this area, explains the power of matching in this way:

"Matching is economist-speak for how we get the things we choose in life that also choose us. You can't just choose a selective school or a job—you have to be admitted or hired—just as you can't simply choose your spouse, you also have to be chosen. Matching is one of the big things that markets do. Markets don't just determine prices, they also determine who gets what. For commodities, the price does most of the work, but many markets, like labor markets, don't clear by price alone. You don't hire just anyone who is willing to work at a given wage, you interview applicants carefully and try to find, and woo, the best ones...For doctors, the marketplace for new graduates has been organized into a centralized clearinghouse that makes efficient matches in students' last year of medical school. (I had the privilege of designing the current clearinghouse algorithm.) Medical marketplaces for subspecialties like gastroenterology are increasingly able to use similar clearinghouses. Some of the same matching technology is now also used for assigning children to New York City high schools and to Boston schools at all levels."

Three of Alvin Roth's proteges at Harvard have attempted to apply matching principles to the NFL draft. They believe that they have designed a solution that would be much more efficient than the current draft system. Under their proposal, each team would still have seven selections. However, they would simply be given a spending limit, and then allowed to participate in an auction for players. One team might spend 80% of its money on one player, while other teams may choose to spend their money much more evenly across seven players. To help promote competitive balance, teams with poor records in the previous year would have higher spending caps.

I'm certainly a believer in using markets to find more effective ways to allocate resources. I also know that the current draft system has many flaws. Of course, I also believe that this auction proposal would be highly entertaining. That should make it very attractive to the NFL. After all, the NFL has made quite an event of the draft in recent years, in partnership with ESPN. This year, the draft stretches over three days, with prime time coverage tonight of the first round. Imagine Chris Berman and Mel Kiper's excitement if an auction replaced the current system. They would be jumping out of their seats!

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