Scott Brave, Policy Economist, Federal Reserve Bank of Chicago
Abstract: For a profit maximizing sports league, performance enhancing drug (PED) testing is a way in which to avoid some of the costs of player PED use while maintaining competitive balance. Profit maximizing teams have a countervailing incentive to want to employ PED-using players that arises from competition. Using a modified version of the competitive talent market model and estimates of MLB team financials from Forbes, I show that PED testing increased the competitive balance of MLB by altering the risk-return trade-off faced by teams for employing PED-using players. For a typical MLB team, I estimate that testing reduced franchise value by an average of 3 million in 2005 dollars over the last ten years. This result reflects significant impacts on teams’ non-gate revenues, player costs, and future profit growth from PED suspensions. Using variation over time in MLB’s testing policy, I also estimate the number of minor and major league suspensions per season (~20 minor and ~4 major league) characteristic of a policy which balances the costs and benefits of player PED use at the league and team levels. At times over the last ten years MLB has come close to achieving such a policy, falling short most often because of an overabundance of minor league suspensions.