How much teams should pay to star players? - Efficient allocation of scarce resources in the NFL

Abstract

In this paper I study how salary allocation affect performance in the NFL. The NFL presents a situation where managers face strict budget constraints and allocate their resources to players valued on a free market. I find that spending on the top few players increases success up to some critical level and exhibits diminishing returns. However, further increasing this spending over this critical level starts to decrease team performance. This result is robust to different specifications. Despite this, managers very often spend substantially more money on stars then the estimated optimal level, implying market inefficiency. Overall salary dispersion does not seem to have a clear effect on team performance.