Abstract
The relationship between salary inequality and performance has become increasingly important. Studies on this topic tend to be limited by the availability of salary information and the difficulty in separating individual performance from team performance. Due to the rich data of Major League Baseball (MLB), this dissertation examines the relationship between pay and performance in MLB from three aspects during the period from 1985 to 2010. First, we examine the relationship from the aspect of individual performance and team performance. Most current empirical studies have explored the effect of salary inequality on team performance, providing mixed evidence. In addition to exploring possible factors for such inconclusive evidence, this dissertation further investigates the effect of salary inequality on individual performances. We then use a team's goal of regular season-postseason participation to provide further evidence of the effect of salary inequality on team performance. This measurement also allows us to explore playoff persistency as it relates to competitive balance. Lastly, this dissertation explores how superstar athletes contribute to salary inequality, as they are the main reason for it. Among players' various performances, certain achievements are more directly associated with winning. As a result, we look at how salary relates to the varied dimension of performance. Our findings suggest that salary dispersion (intra-team payroll disparity) has a stronger effect on individual performance than on team performance. Larger salary dispersion has a positive effect on individual performance. On the other hand, the relative payroll within MLB (inter-team payroll disparity) has a stronger effect on team performance, and it is significantly positively related to team performance. The chance of entering the playoffs in a current season does not depend on the winning status of the previous season. Payroll does play a more important role than the winning status of the previous season in predicting playoff participation. Finally, we find that the contribution of each performance on teams' objective is not equally weighted in terms of reward. More specifically, hitting performance plays a more important role in the reward system relative to fielding performance. This phenomenon is particular significant for high-paid superstars.