Abstract and Keywords
This chapter investigates the constraints that leagues impose on teams for payrolls and individual compensation, concentrating on those issues which are distinct to salary caps and luxury taxes, especially on how each affects the distribution of playing talent, winning, and profits. Before turning to the empirical evidence of the effects of salary caps and luxury taxes, a careful description of the institutions is given. The National Basketball Association experience after the introduction of the salary cap for the 1984–1985 season seems to be evidence in favor of the arguments developed by its proponents. Despite changes in the basic agreement in 1995, 1999, and 2005, the trend in average salaries is largely unchanged. The cap has virtually no effect on the standard deviation of the winning percentage; that is, the cap seems to have no effect on competitive balance.
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