03/22/2013 11:54 am ET Updated May 22, 2013

How About a Free Market for College Athletes?

In 2010, CBS and Turner Broadcasting agreed to pay $10.8 billion to broadcast the NCAA men's basketball tournament from 2011 to 2024. As a result of this contract, fans of this tournament can watch these games on four different networks. And perhaps more importantly (for those of us who work during the day), we can see these games on our computers in our offices.

Certainly all these games make us fans very happy. And all that money has to make coaches, athletic directors, and other university administrators happy. But what about the people we are actually watching?

The people on the court are referred to as student-athletes. And according to the NCAA rules, these athletes are supposed to be amateurs. In other words, other than a scholarship, these athletes are not supposed to be paid.

A few days ago, CBS News did a story on whether the labor market the NCAA employs should be changed. This story focused on a lawsuit filed by former college star Ed O'Bannon, which disputes the NCAA practice of not compensating players for using their likeness in video games. The discussion, though, quickly turned to the issue of whether or not college players should be paid (more than a scholarship). As one can see -- both in the article and in the four videos included in the story -- I tend to think the scholarship is not adequate compensation for many athletes.

To illustrate, consider the Indiana Hoosiers this season. An examination of the player statistics reveals that Victor Oladipo produced 7.37 wins for Indiana (the Wins Produced calculation for college basketball was similar -- in fact, amazingly similar -- to what has been done for the NBA). We are working on the economic value of a win in college basketball, but a conservative estimate is that a win is worth at least $100,000 for a program like Indiana. Given the number of wins Oladipo produced and the conservative value of a win, Oladipo's production was worth (i.e. his Marginal Revenue Product) about $737,000 (and again, this is a crude and conservative estimate).

The following table reports the same calculation for each player Indiana employed this season.


A scholarship to Indiana is valued at less than $30,000. So at least nine of these players were exploited (which simply means they were paid less than their Marginal Revenue Product).

So should the NCAA re-write the rules so that Oladipo gets paid $737,000? This is not what I would propose. Historically, the NCAA has seemed intent on writing as many rules as possible to regulate college sports. And such rules -- not surprisingly -- benefit the groups who have the biggest influence on the rule-writing (i.e. university administrators, athletic directors, and coaches).

What I would propose is stop with the rule writing. Simply allow each team to compensate its players in whatever fashion necessary to get the athlete to come to campus. I would suspect that for most athletes, the current system would continue. In other words, most athletes (across most sports) would simply receive a scholarship to play sports and attend school.

For a few players, though, the situation would be different. A player like Oladipo generates far more revenue for a college program than his scholarship is worth. Consequently, in a free market some school would be willing to pay more for Oladipo's services.

One might wonder where this money might come from. After all, the NCAA claims that many college sports programs are not profitable. Such claims, though, seem dubious. Colleges are generally not-for-profit, and therefore, excess funds tend to get spent (since an owner can't claim these profits). With respect to college sports, one obvious place these funds get spent is in the pay of college coaches. For example, Tom Crean -- head coach at Indiana -- was paid $2.24 million in 2011-12.

The salaries paid to NBA coaches are somewhat difficult to find. But there was a report that Erik Spoelstra -- head coach of the world champion Miami Heat -- is being paid $2.75 million in 2012-13. In sum, Crean is being paid a salary that is not much different from an NBA coach. But NBA teams make far more in revenue than a college team (sports economist Andrew Zimbalist has argued NBA teams earn 10 times more in revenue than a top college team). So how can Indiana afford Crean's wage? Obviously the restrictions on player pay are a big part of this story.

So if we paid more to the players, coaches like Crean would likely get less. But wouldn't the fans also suffer? After all, if the players can be paid, the top teams will simply get all the top talent. And that would ruin the competitiveness of college basketball.

That would be a great story, if the current system looked very competitive. But college basketball -- under the current system -- is hardly competitive. Consider the players Kentucky has been able to recruit in recent years. For example, four of the top 40 recruits signed with Kentucky in 2012. In 2011, Kentucky signed four of the top 20 recruits. And in 2010, Kentucky nabbed four of the top 30 recruits. In 2013, Kentucky is even more dominant. So far,Kentucky has commitments from five of the top 18 recruits. This is the pattern we see without paying the players more than a scholarship (at least, we assume Kentucky isn't paying anyone more).

Would Kentucky be able to get even more players if it could pay more than a scholarship? I suspect that the opposite is more likely to be true. It seems likely that Kentucky recruits this many players because the pay for each is well below free market rates.

And the players go to Kentucky because they suspect -- despite the outcomes observed this year -- that they have the best chance to win games at Kentucky. In other words, because players can't choose a college based on compensation, they must sort themselves on some other criteria. And the big attraction appears to be whether or not the player is likely to win in college. So when one top player commits to a program, other top players have an incentive to follow.

As a consequence, the NCAA has never been that competitive. A few years ago economist Jim Peach* looked at the distribution of Final Four teams from 1950 to 2005. Peach found that 12 teams -- out of the more than 300 Division I teams -- accounted for 48.7 percent of all Final Four slots. So the current system employed by NCAA men's basketball -- with player pay capped at the value of a scholarship -- has not led to much competitive balance.

And if the restriction on pay isn't promoting balance, why should this system persist? We already pay students to do other work on college campuses (as I told CBS News, we pay someone to grade my exams). Why not consider college athletics as just another student job? Again, for many of these students on campuses around the country, this job is probably not worth more than a college scholarship. So the current system can stay in place. But for the players who bring in most of the fans and produce much of the revenue, colleges should be allowed to compensate these student-workers with higher wages. And such a system would eliminate many of the resources currently spent policing the NCAA system of restricting athlete pay.

Let me close by noting that virtually everyone objecting to the NCAA adopting a free-market approach to college sports, currently works and benefits from a free labor market. And if these people were told that their wages were capped by a rule their employer created, they would likely object. In much the same way, people should also object to the current system of compensating college athletes.

Again, it is these people we are watching this weekend. And if the NCAA adopts a free labor market, more of the revenues our watching is generating will actually go to the people we are watching.

*Peach, Jim. "College athletics, universities, and the NCAA," The Social Science Journal, 44, (2007): 11-22

Cross-posted from the Freakonomics blog.