Income risk-sharing in baseball

Pando Pooling is a startup headquartered in Palo Alto, Calif. The company’s founders, Charlie Olson and Eric Lax, met in 2015 at Stanford’s Graduate School of Business where they dreamed up an endeavor that would support people in high-volatility careers—entrepreneurs, primarily. (Pando is Latin for “I spread out,” and also refers to a colony of aspen trees, whose roots intertwine to make a massive underground network.) What if, they wondered, a large enough group of entrepreneurs pooled shares of their earnings, ensuring that each entrepreneur stood less chance of going bust? In theory this would allow entrepreneurs to take more risks in pursuing their ideas.

Olson and Lax didn’t start with entrepreneurs, though. They took their idea to a different field—literally. Just as MLB teams pool a third of their revenue to support smaller-market teams, Olson and Lax saw an opportunity to give young baseball players more security. As with entrepreneurs, only a small set of players go on to earn fortunes; many talented, driven players leave with little. (Less than 25% of first-round draft picks play more than three years in the majors.) Unlike tech founders, though, players are paid at regular intervals.

Here’s Pando’s pitch: A young player contributes a fixed share of his salary to his pool after he receives at least $1.6 million in MLB earnings. There is more than one pool, but every member in each pool must agree on every other poolmate, and Pando takes 10% of each pool. Pando recruits players through agents, financial advisers and players who have already signed with the company; Olson says he has 150 members so far. Once a player is on board, Pando then tries to match him with a handful of similar players to form a pool.

Here is the full Sports Illustrated article.  It is a longstanding puzzle why such arrangements never have taken off.  Is it some mix of adverse selection, excess optimism, too high resulting marginal tax rates, and bad PR because it is vaguely reminiscent of slavery?  Still, just think — if this could work the incentive to invest in the talent of other people would be so much higher.

Via Conor Durkin.

Comments

baseball players, indeed all those who pursue right tailed career choices, are deluded about their talents.

"Why pool my money if I am going to make it?"

In the mid-20th century, professional golfers would form pools to share their winnings. This prevented gambler's ruin where a Depression era golfer would run into a cold streak and not have enough money to get to the next tournament. But up and coming stars tended to defect as their winnings got bigger. As purses got bigger, this practice fell out of favor.

Steve - interesting.

Why don't college students form debt-payoff pools? Because each student thinks they're going to be the successful one who winds up paying off everybody else's student loan.

On the other hand, I should have pooled my MBA loans with the rest of my class, which now (40 years later) has three billionaires.

Professional athletes might be a good fit for pooling. One could pool players by draft round, for example, perhaps adjusted for position if say pitchers make significantly more than second basemen. Moral hazard might also be less of an issue because players' competitive instincts will motivate them regardless of pooling. (Think of all the motivated amateur athletes.) After all, they play a game, not like real work.

For other professions, I think adverse selection and moral hazard matter. How does one determine which entrepreneurs should be pooled together, i.e., which have similar prospects? Re: moral hazard, consider that this pooling is in addition to already high marginal tax rates.

My first instinct was a moral hazard issue and free rider. Would players continue to maximize their incomes when it becomes clear they are never going to be a superstar but can still earn a good income from someone who did make it big? You might also need to buy insurance against injury because the breakout star might suffer an injury that collapses a given pool. Enforcement of the contract could be difficult and expensive. Taxes on earnings could get tricky without clear guidance from IRS (good luck).

Would you have surgery and undergo extensive rehab if others reap the benefits? Would you extend your career as long as possible if your marginal earnings are low? You are 34, your skills are in decline, and you are the only one in the pool still playing. Is it worth it?

What if players in the pool have substance abuse issues? What are the conditions that can have you removed from the pool?

Look at Frank Thomas toward the end of his career he signed incentive-heavy contracts. Then the Toronto Blue Jays sat him and prevented him from reaching his incentives. (Arguably he was playing better than his replacement but Toronto had a financial incentive to sit him as they looked at new younger players that had greater long-term potential.)

What if players start to structure contracts for superstars that are "personal service" contracts and not, on paper, only about playing time on the field. For example, a $20,000,000 contract includes five years of consulting for the team after retirement.

Would you take part if you fear others will game the system?

Does nobody else remember being a supremely self-confident teenager? To me that is an easy explanation for why more MLB prospects are not interested in pooling.

This is quite common in poker on a per-tournament/per-game basis and is called staking. But there can be some controversy because staked players might find themselves playing against each other and have an incentive to soft play each other.

Poker tournaments are different to some degree in that
1. There’s an entry fee and
2. in any given tournament, every player’s most likely outcome is losing that entry fee.

If the fee is large enough the variance can make playing hard to stomach for those without large bankrolls, even if playing has a positive expectation. Baseball careers are not similar - there isn’t a need to swing a deal to reduce variance enough to get you to play - you’re going to play regardless because it’s a freeroll.

This need does exist, however, in start-ups, which is why venture capital firms exist.

There also has been talk in the past of players selling shares in themselves. They get to use the money from investors when they are low paid in the minor leagues, then the investors get a portion of their salary when they reach the majors. That hasn't gone over well, either.

Professional athletes are extremely competitive, and the most elite tend to be competitive to the point that no one likes them. You cannot play a friendly game of checkers with a professional athlete. It is in their nature to beat you into the ground at everything. Sharing money for this type of person is not in the cards.

What sets pro athletes apart from amateur athletes isn’t ultra-competitiveness/psychopathy, it’s superior physical attributes from superior genetics.

That said, pro athletes probably are somewhat more egotistical - but this is the effect, not the cause, of their successes throughout life.

I am missing how this is like slavery

Me, too. I thought of unions.

I like it! The challenges of moral hazard, adverse selecyion, etc are real, though. So maybe it would be better if the government garnered a share of everyone's income, and then used the proceeds to pay for things everyone wants, like public education, health care, retirement?

I don't think the free rider problem gets any easier to solve that way....

A better strategy would be to add an options feature to the contract for the creation of a new league if sufficient members join the pool. This overcomes the problem of creating a critical mass of players to form competing teams in a league. The option feature might depress initial earnings, but it might also increase future earnings if players obtained an interest in a potential future team.

A friend who is an expert in sports economics always was looking for ways that players could integrate into sports team ownership, since they were the productive asset, although he said that league owners owned via long term contracts the stadium asset which made it difficult for new entry in existing markets, but not markets which did not have established teams with contractual rights to stadiums.

If you are interested in the economics of sports, you might want to look up some of the work by Roger Noll. It is not surprising these students were at Stanford.

"It is a longstanding puzzle why such arrangements never have taken off."

Sigh. Maybe if you fritter and waste all your life trying to maintain some obtuse delusion you struck upon in your formative years.

But not for normal people. Inequality is something we can't seem to get away from. Why? Perhaps it serves a valuable function? Perhaps inequality is nature's way of bringing out the best in all of us. Perhaps winning big motivates and losing big . . . motivates as well and milquetoast doesn't motivate anybody, is just a gravity blanket for people who want to quit living.

The piker before chance has already lost, has built it in.

"In theory this would allow entrepreneurs to take more risks in pursuing their ideas." In what theory? In no legit theory does decoupling risk and reward incentivize risk.

Guys who play in the minor leagues for three years earning what they agree they are worth (or they wouldn't be making the exchange) don't need b-school hero-saviors. They sure don't need them at 10%. Jesus.

If Tyler does not understand why this isn't popular, he has never met a professional athlete. Or an amateur athlete. Or a high school athlete. Or a Little League player.

The need for “insurance” for new draft picks is already mitigated to some degree by the existence of signing bonuses.

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