Matching markets: A better alternative to free agency
Free agency came into being in the 1970s as the dominant labor structure for veteran players in professional sports. Free agency was not, however, formulated as a consensus-based plan. It was not created for the benefit of the players, league, owners or fans. Free agency came into being as a default system when the reserve clause was abolished. It should be no surprise that free agency has performed poorly for professional sports.
Teams incur significant risk by offering contracts to athletes when performance cannot be predicted over the length of the contracts. Salaries are enormously disparate among players. This is more appropriately viewed as a complication of free agency rather than equitable distribution of a fixed (salary cap) personnel budget.
Player movement in free agency is not designed for the benefit of the sport. The movement of star players in free agency can decrease overall athletic performance in the league by changing the equilibrium and player roles among all the teams involved. The movement of players in free agency also can disrupt important relationships with fans. Is the league better off because Tom Brady never left New England? Would the league have been better off if Kirk Cousins had stayed in Washington?
Numerous modifications have been made to free agency over the years, including years of service required prior to unrestricted free agency, restricted free agency, maximum contracts, franchise tags, etc. All of these have been put in place to lessen the negative effects of free agency and serve to demonstrate its flaws. The most rational explanation for the continued existence of free agency is the lack of a better alternative.
An alternative to the many problems of free agency is computerized matching markets. An emerging entity of the 1990s and 2000s, computerized matching markets are particularly suited for professional sports with existing salary caps. Preference lists created by teams can account for a team’s individual player selections as well as groups or combinations of players. Preference lists created by players can specify desired teams while automatically maximizing salary within boundaries determined by consensus between the players and the league. Total salary cap would be determined as it is now, through collective bargaining. Thus, total player compensation would remain unchanged.
If designed appropriately, all parties can state their true preferences without worrying about wasting selections on unattainable choices. This critical feature simplifies the use of the system. Teams and players can state preferences without employing “gamesmanship” to strategize probabilities over which they have no control. In addition, all matches, using the terminology of market design, can be “stable.” Translated to professional sports, a stable match is one in which a player may prefer a different team and a team may prefer a different player, but there would not be any player-team pairs who prefer each other to the match results.
A well-designed matching market for professional sports depends on a different mechanism for financial and roster stability. Free agency depends on contractual terms to maintain stability. The appropriate compensation to a player over the life of a contract is difficult to predict, meaning that players are very likely to be overpaid or underpaid. A matching market works best if the teams are reselected every year, yet stability would be increased versus free agency. Since preferences from teams and players change only modestly from year to year, changes in rosters and salaries would change in a much more ordered, less chaotic fashion than occurs with free agency. In other words, the stability of the matching market would depend on decisions similar to the Packers wishing to reselect Aaron Rodgers and the Bears wishing to reselect Khalil Mack.
Matching markets can be created with a great deal of flexibility. Salary levels, number of players at each of those levels, opportunities to earn bonus money for exceptional performance, and a variety of other factors can be made to conform to the wishes of the league and the players. Since the total team salary would be determined exactly as it is currently, by collective negotiation, there should be no concern that the players overall will receive less compensation. Matching markets would be difficult to apply to leagues without a salary cap.
Matching markets would benefit owners by allowing greater retention of vital players without the risk and unpredictability of long-term contracts. It would benefit fans by a more logical and ordered movement of players among teams. It would benefit players by being a more straightforward system that would maximize their salaries annually according to the quality of their performance. This would place salary more in the athlete’s control. The better an athlete performs, the more he will be paid. The tactics, fortunes and misfortunes of contract negotiations would all but disappear. To the benefit of everyone, the movement of players among teams would be less chaotic with less disruption of the team’s athletic chemistry. Finally, matching markets would be much easier for teams to utilize and for players and fans to understand. The accounting quagmire resulting from free agency would be greatly streamlined.
Market design has greatly advanced since the advent of free agency. Professional sports would be wise to adopt these important innovations.
Dr. William Douglas is a cardiac surgeon at Children’s Mercy Hospital in Kansas City and is an avid follower of professional sports and salary systems.