Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, October 05, 2005

Hockey's (Purportedly) Hard Salary Cap

Tonight, as I was driving home, I was listening to Sportsnet's discussion of the "hard" salary cap. The participants all agreed that the contract has a definite, solid, hard cap. Their reason is that every transaction must be approved by the NHL league office, and the office will not approve any transaction that puts the team over the cap, no matter what!

What if everyone believes the league office really, really, truly will monitor every single contract and not allow teams to exceed the $39m salary cap. How else might teams spend more without exceeding the cap?

This question is no different from any other price-ceiling situation that we talk about in economics all the time: impose a price ceiling on a product, and people who really want to buy that product start figuring out how to get it. E.g., for gasoline price ceilings we have, in the past, seen long lineups, favouritism, hiring drivers to wait in line, and egregious tie-in sales (get an oil change and we'll move you to the head of the line).

How might a team exceed such a hard salary cap? Here is just one possibility that I thought of during the drive:

I might be able to sign the player to several contracts if I have some ancillary operations or arrangements.

  • I could pay him a lot to model for the cover of the programmes.
  • I could give him a huge endorsement contract for some firm (that I own) that may or may not advertise in the arena.
  • I could induce advertisers to offer him large endorsement contracts and in return offer them lower advertising/sponsorship rates for the team's games.
I am sure there are many many other evasions that more creative minds than mine will discover.

No, the cap is NOT hard. People respond to incentives.
Who Links Here