Monday, March 07, 2011

Will a new NFL Collective Bargaining Agreement Lead to More Inefficiency?

In a study conducted several years ago, Cade Massey and Richard Thaler found that high draft picks in the National Football League are overvalued. In other words, teams seem to give up too much for top picks, particularly given the high financial cost and the uncertainty regarding whether they will turn out to be good players. Ryan Leaf and Peyton Manning were selected at the top of the NFL draft and received similar contracts. However, one turned out to be a Hall of Famer, while the other was a complete bust.

One can trace the improper valuations of top draft picks to the famous chart developed by the Dallas Cowboys organization during the early 1990s. That chart enabled Jimmy Johnson and Jerry Jones to quickly assess the value that they should seek in return when making draft trades. Chart usage spread quickly throughout the league. Unfortunately, the chart caused people to give up too much for top draft choices!

Why bring up this research today? Well, I began thinking about it again as I considered the implications of a new collective bargaining agreement in the NFL. The owners are pushing hard for a new salary scale for rookies, which would significantly constrain their pay. If they achieve their goals, then I wonder how this will affect the efficiency of the draft trade market. Will teams recalibrate their trading philosophies in light of the new wage scale? How long will it take for teams to adjust? Will some teams be more adept at adjusting the value that they place on high draft picks? I can see a new study in a few years examining how teams adjusting to a new financial reality. My guess is that it will take some time for teams to adjust properly, and some teams will clearly do better than others.

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