04 December 2007

The Curious Economics of the Designated Player

One of the basic principles of economics is scarcity. There is a limited resource, and a task is how best to divide it. In Major League Soccer, money is the resource most subject to the rules on scarcity (even without jokes on profitability). We may want our teams to be talent stocked like Barcelona, or Liverpool, or Arsenal, but the money simply isn't there. Indeed, the salary cap puts a known figure to define the supply of the money you have to work with.

In practical terms, the salary cap lends itself to analyzing roster moves in trade-offs. Do you want a proven, above average holding midfielder at $90,000 a year? Or do you trade away that midfielder and promote two promising developmental players to around $45,000 a year? The supply of money is fixed, and you have to make the decision. Even in sports without the salary cap, your bankroll is limited by an owner's willingness and ability to spend money. Every choice in salary has to be viewed as a tradeoff against another choice. Economists like to invoke the term utility somewhere around here, talking about how much you get in return for each dollar your trade for your players.

The Designated Player is a strange world which doesn't seem to adhere to the typical considerations. Other than a choice between having $1.85M to spend in a cap, plus a designated player, or a $2.25M cap without a designated player, there's no trade-off among players to speak of. Look at the Veron situation: It looks that United has decided he's that player they would bring in using the Designated Player rule. Now, let's suppose the two sides sit down and talk money. United wants to spend $14M over two years, and Veron's people want $30M over three years. On a per-annum basis, that's a difference of $3M per year. But, here's the strange thing: In most other roster transactions, United would have to balance the prospect of moving towards the Veron number against better uses for investing that money. I mean, United could pay Veron the $10M he wanted, but they could also invest that $3M in other players. And that option, depending on the players, could look reasonably attractive. It doesn't work in the Veron case, though, since the choice is either "Do we spend more money, or not spend it at all?" You can't save that $3M and spend it elsewhere (other than in the sense of spending it on organizational details.) So there's less marginal utility to saving the money, making it an easier choice to give in to a demand for higher money.

I bring this up because both Anonymous and Nick had good reactions to the initial reports on salary figures being discussed foor Veron. Anon wrote:

How 'bout we pass on Veron and use the 30M for incentives instead. Cash and perks to the team for wins, goals, saves, silverware...

Better yet, how many Emilios could we bring on board for 30M?

Only partly kidding here... that kind of differential has got to weigh on the team a bit -- in the locker room if not on the field.

And that locker-room chemistry is one of the things that defines DCU and makes them great. A bit of a risk, no?

And I admit, that's partially how I look at things, except the answer to his question of "How many Emilios could we get for 30M?" has an answer -- at most one, and Emilio is costing us only a few hundred thousand under the cap. There's not really a choice there. As for locker room chemistry, I imagine that most of the leadership of the team will accept Veron. Galaxy players are standing up for Goldenballs, so there's no reason to think that United players won't accept Veron as one of their own.

Similarly, Nick wrote

The Argentinean press has said 2 years and 20 million dollars since last august. I love Veron, but I don't think he's worth 10 million a year. I'd say that would be Riquelme money...
I agree with Nick entirely -- I would willingly fork out $10M for Riquelme and personally offer him a piggy back ride from South America to DC if it would get him here, and I don't think Veron rises to that value in a traditional sports model. But the question is defeated by the strange economics. If the choice is Veron or nothing, the benefit of saving money is a salary negotiation is reduced. It leads, in a strange way, to artificially inflated salaries. That's not to say that there's no limit to what you spend. You still have to consider what revenue Veron would bring, and how many wins he gets you, and figure out if he's worth it, but the marginal value of each dollar saved is decreased because you can't spend that dollar saved in other places. So while I normally, running a team in pretty much any other league in the world, would look at $10M for Veron and say "that's ridiculous," I won't say it here. If United decides that $10M isn't too much to pay for the player they want, then I know that their paying $10M isn't in some way cheating us out of a better option. And in that case, I suppose the deal makes more sense then it would if there was no Designated Player rule.

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At 04 December, 2007 13:47, Blogger Oscar M. said...

The question really is, who else could we realistically sign for $10M/year as a DP? At the moment, I bet that list is empty.

At 04 December, 2007 14:01, Anonymous Anonymous said...

Thanks for responding... I've never inspired a whole blog post before!

I admit, my reaction to that pie chart was a bit of a knee-jerk. And while I have a basic understanding of the DP rule, it's very helpful for you to spell it out in more detail.

I'm still uneasy about the Veron deal. All things being the same, I'd rather have a super team than a superstar.

Galaxy players are standing up for Goldenballs, so there's no reason to think that United players won't accept Veron as one of their own.

One caution here... When there's such a huge difference of 'value' placed on an individual within an organization, there's always a potential for resentment, unrealistic expectations, awkward bar-tab situations, etc..

I think the key to that social situation working out is very personality-driven. (Talking locker-room here, not on-field professionalism.) Some people have a knack for minimizing differences, while others tend to exacerbate them.

I wonder if this isn't an important factor as to why some DPs work out and others don't.

In the case of Veron, I admit I have no idea how it would play out. I barely know him as a player, let alone as a personality.

I guess my only point is that there are two sides to bringing in a DP. The first is obvious -- what they bring to the game. The second is subtle -- what do they do to the chemistry of the team.

I'd argue that both are equally important, and should be weighed in the decision.

Hopefully, when (if) Veron arrives, he will embrace the league like Becks, and the team like Emilio. If so, he'll look good in Black.

- rke

At 04 December, 2007 14:44, Anonymous Skippy said...

I wrote a really long post and just deleted because it was so unclear. Let me just say, it is not ENTIRELY between spending the money or not spending it. There is opportunity cost also.
A designated player seems to be largely used as a marketing tool and/or someone to build a team around. Frankly, I don't think United is in a situation where it needs either or those. Which means the DP is a different tool to United than it is to some other teams. A designated player to United has to be much more of a team player, in that he would be filling a need position or talent gap within the existing team. Which means, they shouldn't bring someone in just because they can - once the contract is signed, presumably for several years, United can't bring in a big name player to replace some who leaves, is injured or retires.
I guess I am saying that United doesn't seem to need a DP to compete right now in this league (yes, I'm sure one would help) and I would hate for DCU to not have the option when it is needed or is presented with an irresistible opportunity ("Kaka inspired by DCU story; wants to join team!" etc).
That said, holding on to the option has costs also and one could go the wrong way with the argument I just made.

At 04 December, 2007 23:47, Anonymous Nick said...

An excellent post. There may be one more factor to account for in the economic analysis here: The Generation Adidas rule.
Now, I'm not 100% sure about this, but I think that Generation adidas players do not count against the cap. Additionally, I'm not sure how a player is categorized as Gen Ad, but I think it has something to do with him being a teenager and talented.
I commented on a different post that I believe Veron's FMV is around 3 million dollars. So let's envision that DCU is toying with the idea of "overspending" up to 7 million dollars. Perhaps one of the opportunity costs of spending those millions on Veron would be 2 to 3 teenage Argentines in the Freddy Adu category that would qualify as Gen Ad, add significant on and off-field value, and not count towards the cap?
Perhaps the rules do not permit such a maneuver, in which case I would have to say your economics are right. Then again, that money could always be spent on local youth development as well. These are interesting choices that the front office will have to make...


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