Thursday, October 7, 2010

The Economics of Trading Randy Moss

This is one of the biggest sports stories this week, but even if you're not into sports, there are some interesting economic concepts involved.

The New England Patriots traded Randy Moss (an elite star wide receiver) to the Minnesota Vikings for a third round draft pick next year (not very much). They made the trade in the middle of the season and without much time left before the trade deadline.

Mid-season trades are unusual in the NFL because there is important specific knowledge associated with being on an NFL team. Success in the NFL is about having the right timing with your teammates, especially the timing between a quarterback and a wide receiver. As this timing gets built up over the season, a mid-season trade means that the traded player has to rebuild this knowledge to get the expected level of performance. In economic lingo, we call this specific human capital (the type of knowledge that makes an individual more productive in completing a specific task, or working in a specific industry or working for a specific company).

In the absence of other factors, this specific knowledge reduces the value of Moss to Minnesota (it will take some adjustment for Moss to be at full capacity) and it increases the value of Moss to New England (they already have a scheme in place, and Moss is familiar with this scheme). Both of these effects make a trade less likely. Yet, Moss was traded. Other factors must have been at play.

It is easy to see why the Vikings wanted Moss. Minnesota was desperately in need of a talented wide receiver, and Moss fills that gap, but why would the Patriots want to unload of Moss at such a low price if they had any specific human capital invested in him? There is some economics to this side of the story as well.

Earlier in the season, Moss announced that this is likely his last season in New England, even though he planned to continue playing in the NFL. Knowing this, the Patriots knew that Moss was not motivated to impress general management for a long-term contract, and Moss has a history of being extrinsically motivated.

At New England, Moss would only have an interest in playing hard to put up big enough numbers to catch the eye of another team. The Patriots have an interest in winning. It is possible that these two interests align, but Moss would put little weight on winning if it means that he has to sacrifice better statistics (which sometimes it does). That's not so if he is playing for the prospect of a long-term contract with the Patriots. This misalignment in incentives reduced the Patriots' valuation of Moss enough that they wanted to trade him.

Now that he is in Minnesota, Moss has an incentive to help his team win because that gives him a better chance of receiving a long-term contract. Minnesota won't be impressed with big numbers if it costs them wins. Hence, Moss will want to help produce wins. On account of these better incentives, the Moss trade makes sense.

No comments:

Post a Comment

Please feel free to share your ideas about this post in the open forum. Be mindful that comments in this blog are moderated. Please keep your comments respectful and on point.