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Why Are Sports Players Paid So Much More?

Article from [http://online.wsj.com/article/SB10001424052748704111704575355162960155010.html]

During the summer of 2010, LeBron James, one of the most popular players in the NBA, was deciding between whether to sign with the New York Knicks, the Miami Heat, or the Cleveland Cavaliers. Although he claimed the choice was difficult for him, the difficulty did not depend on salary. Each team was prepared to offer him an annual salary of approximately $19.2 million a year, a staggering sum to more than 99% of Americans today, where a household earns an average of $45,000. Is possible to say that the work that LeBron James does (i.e. play a game) is worth more than 400 times more than that of the average American? In a free market society, the answer is yes.

This becomes easier to understand when you view the bidding over free-agent sports players as an ascending auction with first-price bidding. In essence, you can view the process as a game. The players are the sports teams, and they all want the services of the bidder, the sports star. While it is difficult to turns statistics such as rebounds, points per game, or assists into a pure dollar value, when you consider the revenue that a sports star can add to a franchise, the massive salary that they receive makes absolute sense. Having LeBron James on your team would increase ticket sales, jersey sales, NBA TV sales, video games sales, action figure sales, etc. Professional sports are such a star-driven business, and athletes like James make it run smoothly. Because of this, if one team who was looking for James’ services shaded his bid too low under their true value vi, then another team could guarantee that they would get James by offering a value slightly above vi. This repeats itself until each team offers him the maximum amount allowed under the salary cap, which is approximately $19.2 million. This is because LeBron James is worth at least that much to his employers, if not more.

It is hard to think that a person who plays a game is “worth more” than a doctor who saves lives, but it becomes even more astounding when you consider that the owner of the Los Angeles Lakers privately mused that another superstar in the NBA, Kobe Bryant, is probably worth around $75 million to his team. However, to our employers, this does make sense. If an average American demanded that he get paid $19.2 million for his job, the employer would simply fire him, as there are no competing employers who would be willing to pay that, and there are plenty of other people who would take that job at that salary, beckoning in the economic principle of supply and demand while also satisfying the auction game, where the disgruntled employee (the seller) asks for a price that is vastly above the bidders’ true values of the employee, vi, so they simply do not bid.

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