Really Simple Economics

As an economics major I tend to look for things that relate what I am studying(economics) to something I wish I was paid even a small amount to cover on a regular basis (baseball). Thank god I know that they supply of people who want to be paid to write about baseball (astronomically high) does not have a pleasant equilibrium with the demand for people to write about baseball (not at high as I wish). As someone who has experienced working in the wonderful world of sports for a summer I took away two things...

1. A lot of people love sports and even being a small part of a Major League team is enough of an incentive for them to deal with point number 2..
2. You get paid less than you would make panhandling.

The same thing goes for athletes. There is an incredible supply of kids who want to grow up and play ball for a living and a minuscule demand for those kids. There are several theories about competitive balance that are behind this. One simple to understand argument was made by Andrew Zimbalist. In short, he describes 'Talent Compression', which is simply that the ratio of the population:ballplayers has to stay high in order to achieve a high level of competition needed to make professional baseball a worthwhile business endeavor (yes, baseball is a business first and a sport second. Anyone who disagrees with this I will point in the direction of either the Boston Red Sox or the Florida Marlins, two teams who have found different ways to maximize their profits. One by creating stupid new uniforms and pink hats for fans from 2004 and beyond to buy and the other that has a small fan base and thus doesn't spend money on free agent talent because that is not how they will maximize their profit.)

Anyways, in the New York Times today an interesting article, which is more about the economics of crime than it is about the economics of sports, about how to penalize players so the taking PED's are more than a suspension and a small loss of salary. The math is simple to understand...

So by using the performance-enhancing drugs (and ignoring his other possible career paths, like the minors), the expected value of his salary is (probability of getting signed)(probability of not getting caught once signed)(salary) + (probability of getting signed)(probability of getting caught)($0 pay) + (probability of not getting signed)($0 pay) = 0.95(0.9)($10 million) + 0.95(0.1)($0) + (0.05)($0) = $8.55 million.
If he doesn’t use the drugs, his expected value is (probability of getting signed)(salary) + (probability of not getting signed)($0 salary) =0.05($10 million) + 0.95($0) = $500,000.

All this is is a simple expected returns equation. If the expected return for using drugs added to the expected sanction for being caught is greated than the expected return for not using drugs, then players will shoot up if they are rational actors (which in some cases can be debated). To get more complicated we make up some more numbers, like this author did (I'm not knocking her for it, there was no other way to make this work as we do not have data that tells us the exact probability of making it to the majors by using PED's and not using PED's). If we want to we can use game theory and find a mixed strategy equilibrium by combining the cost and benefit to players using PED's and the cost and benefit to baseball as a whole due to players using PED's, and find the socially optimal level of chances of the players cheating and the probability that baseball will enforce. (Note: Since there is always an incentive for the other side to not cooperate we need to used a mixed strategy game to solve).

Anyways, here is a link to the article.

It's a short read.