Salary Allocation and Risk Preferences in the NFL: Abstract

This is the abstract from the paper “Salary Allocation and Risk Preferences in the National Football League: The Implications of Salary Allocation in Understanding the Preferences of NFL Owners” by Papa Chakravarthy. Please find the full text here.

The study of risk preferences in the allocation of the National Football League’s salary cap has not seen much academic research. Previous analysis shows that the salary cap improves parity across the NFL and may be partially responsible for the growth of the United States’ most popular sports league. Allocating salary to players, however, can reveal a great deal of information regarding the utility function of NFL Owners. This paper illustrates, using data on wide receivers in the NFL from 2005 to 2009, variables predicting future performance in the NFL do not predict future salary, meaning Owners value something in addition to future expected performance when allocating salary. The potential to become a star, leadership or popularity may be the characteristic valued by Owners that is not shown by OLS regression. A comparison of NFL Owners to fantasy football owners shows that while the method of risk aversion differs between the two, it is impossible to rule out risk aversion by NFL Owners trying to retain aged players with high salaries. Finally, it is possible that NFL teams may improve team performance while staying within the salary cap by cutting players more frequently and signing shorter contracts, thus eliminating the need to overpay players and fielding a more competitive team.

For more, click here.

You can reach Papa Chakravarthy at papac@post.harvard.edu

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