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:
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.
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?
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.