Date of Award

4-2026

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Khemraj, Tarron

Area of Concentration

Financial Economics

Abstract

The purpose of this thesis is to examine the relationship between team payroll and team performance measured by winning percentage in Major League Baseball over a 20-year sample period from 2005 to 2024, using a panel dataset including all 30 teams. Building on microeconomic production theory, this investigation is supported by the estimation of two model specifications, a log-linear and a quadratic specification, testing both the linear payroll effect and the impact of diminishing marginal returns through three models: a pooled OLS, a fixed effects model, and a random effects model, as well as a series of diagnostic tests. Additionally, the competitive advantage of large-market teams is examined through the inclusion of a market size dummy variable. The final results show that there is a positive relationship between payroll and winning percentage. The log-linear specification is able to show statistically significant evidence of diminishing returns at any payroll level. The quadratic specification refines this finding, suggesting that in the given sample, diminishing returns only exist beyond a certain payroll threshold. All models consistently show that large-market teams do not directly benefit from a competitive advantage beyond payroll. Nevertheless, market size gives large-market teams an indirect advantage through its positive effect on payroll spending. This study underlines that, in order to strengthen the competitive balance within Major League Baseball, implementing a hard salary cap is the most direct policy measure from an economic standpoint.

Rights

The author has granted New College of Florida the nonexclusive right to archive, make accessible, and distribute for educational purposes this work in whole or in part in all forms of media, now or hereafter known. The copyright of this work remains with the author.

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