Quid Pro Quo? Oh No: University Revenues and Compensation for Student-Athletes

In 1993, Chris Webber, a member of the Fab Five from the University of Michigan, entered the NBA draft after leading the Wolverines to two NCAA championship games. After the Fab Five’s first winning season, the sales of University of Michigan merchandise rose from $1.5 million per year to over $10 million per year. Despite the massive revenues that Webber helped to generate for the University of Michigan, NCAA bylaws prohibited Webber and his family from receiving any compensation. In an article for the Journal of Sports Economics, consultants from applEcon describe the unequal monetary exchange between universities and star student-athletes. In so doing, they corroborate Webber’s reason to enter the NBA draft, a reason that may also enter the minds of today’s “one-and-done” student athletes.

Authors Erin Lane and colleagues treat men’s college basketball as a revenue sport, one that generates benefits for the university beyond ticket sales alone. For example, the celebrity status of a high-performing team may attract donations and help the school recruit students. The authors compare male college basketball players’ compensation in the form of athletic scholarships to the marginal revenue product (MRP) that universities generate from these players. In this case, MRP is effectively how much more revenue a university generates from a single player, holding other factors constant. To estimate MRP values for individual players, the authors compute a team’s total revenue, holding constant variables that may influence university revenue such as athletic conference, whether the team was sponsored by Nike, and the number of games televised during the season.

To compute a player’s contribution to team performance, they multiply his performance statistics and his “weight in the team,” meaning the ratio of his performance statistics to the team’s statistics. A player’s MRP is then the product of (1) his contribution to team performance, (2) the effect of team performance on the team’s win-loss percentage, and (3) the effect the increase in the team’s win-loss percentage has on revenues. Using combinations of three different methods, the authors estimate MRPs of different players. The first method estimates a player’s MRP based on his performance statistics.

The second method estimates a player’s MRP based on the distribution of NBA salaries for players with similar performance statistics. For those players who are NBA-bound or are ultimately drafted into the NBA, the third method estimates their MRPs based on their future draft status (i.e., whether they were drafted or not) and how much revenue the other NBA-bound players on the team generate for the school.

Although the MRP estimates for NBA-bound players vary by the method and the combination of methods used, one thing is clear: The ranges of estimates far exceed the financial aid that players actually received. The authors find that about “60 percent of all men’s basketball players have a monetary contribution to [their] school that is greater, often substantially greater, than the value of the scholarship the player received.” Accounting for the player’s performance statistics, the distribution of NBA salaries, and the effect of other NBA-bound players on the same team, the authors estimate that nearly every NBA-bound college basketball player generates profits for his school that average roughly $400,000 and range from $7,000 to $1.8 million.

MRP estimates varied importantly by the size and prestige of the university at which athletes played. The NBA-bound player at a low-revenue basketball program realizes an MRP that ranges from $5,000 to $400,000. The NBA-bound player at a high-revenue basketball program realizes an MRP that ranges from $100,000 to $2 million.

In 2006, the NCAA capped financial aid for student-athletes to a full grant-in-aid that includes tuition and fees, room and board, and required textbooks. Today, the cost of attendance at the University of Michigan can be as high as $27,500 per year for an in-state undergraduate and $54,000 for an out-of-state undergraduate. In 2011, the NCAA increased the scholarship limit by $2,000 to cover incidental expenses such as school supplies and travel between the school and the student’s home. This increase in the scholarship limit acts like a stipend to student-athletes who receive athletic scholarships. Nevertheless, there is still a sizable disparity between what a star student-athlete receives in financial aid and the revenues they generate for their university. The enormous gap between an athlete’s scholarship and his value to his school is certainly not an incentive to stay in college.

Two decades ago, men’s college basketball players who left school for the NBA prior to graduation were rare. Today, “one-and-done” players are more and more common. The top three picks in the 2012 NBA Draft had only just finished their first year of college. With the popularity and profits from college sports growing every year, the question of if or how to compensate student-athletes is more relevant than ever. Writers from The New York Times and ESPN have debated the issue at length. Certainly, there will be more research and opinions to come.

Feature Photo: cc/CP Fleck