Monday, November 8, 2010

Circumventing the Payroll Cap

As I mention in my Sports Economics course, teams have an incentive to circumvent a payroll (aka salary) cap due to incentive that the marginal cost of the players salary is less than the marginal gains in revenue. If this was not the case, the payroll cap would be ineffective.

Here is a recent case, where a team (New Jersey Devils) were accused of circumventing the payroll cap in the NHL, with the original deal (notice the lower effect the contract on the left has on the average salary) and the new deal - which has a higher average since it is over a shorter period of time and does not tail off as the original deal. (Please note: I am not a cap guru - so the details are a little fuzzy).

Since the NJ Devils were accused of circumventing the payroll cap, they have been penalized by losing two draft picks and $3 million. Ouch!

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