Revenue Sharing in MLB: The Effect on Player Transfers

The 1997 collective bargaining agreement between the Major League Baseball owners and players’ union considerably altered the system of revenue redistribution. This system, a convoluted cross-subsidization system, known as the “split pool plan”, was designed to progressively redistribute income from the highest revenue generating teams toward the lowest revenue-producing clubs. The 2003 agreement extended the basic system of revenue redistribution, but increased the tax rate to 34%, and modified the nature of the redistribution. The purpose of the revenue sharing system was to alleviate a growing disparity in revenue generation, which MLB claims is continuing to cause increased levels of competitive imbalance. The new scheme is examined theoretically within the principal-agent framework, which shows that the incentive to divest in talent is increased for low revenue clubs. Empirical results are supportive. Payroll disparity and competitive imbalance increased modestly from the period immediately preceding implementation. Most striking however is a significant increase in the rate that productive players have transferred away from low revenue teams. This strongly suggests that these teams were acting on the increased incentives to divest in talent.