Many sports fans see salary caps as avenues via which "small market" teams can compete with large market teams. There are two problems with this thinking. First, if teams maximize profits the value of a player to a team in a profit-maximizing world is his contribution to team revenue which is, in turn, dependent on two things: his his contribution to winning and fan willingness to pay for winning. A cap on salaries, payrolls, etc. does not change the value of individual players. It just constrains what they can be paid monetarily in any given year.
Shrewd management and salary cap loopholes allow teams to find ways around salary caps so that players can be paid a sum close to their value, whatever form the "payment" might take. Deferred payments, anyone?
At the end of a season, if performance bonuses previously included in a Team's Team Salary but not actually earned exceed performance bonuses actually earned but not previously included in Team Salary, an amount shall be added to the Team's Salary Cap for the next League Year equaling the amount, if any, by which such overage exceeds the Team's Room under the Salary Cap at the end of a season.
This dizzylingy obtuse regulation is unwittingly having a profound effect on the NFL's economic landscape.
The level playing field the NFL's salary cap supposedly created?
It's a myth.
Because of a variety of complicated tricks that savvy NFL team officials have figured out, teams can manipulate their salary cap to the point where their cap figure winds up millions of dollars higher than the teams they're competing with.
And it's not all about writing contracts to create cap room. Skip writes:
If you write player contracts with incentive bonuses that are likely to be met (i.e. with application, effort and good fortune), you create cap room for next season. Paid bonuses -- normally a happy, desirable outcome of incentives -- reduce allowable spending in the following year. Enter crafty management, and incentive clauses purposefully designed to not be attained. And coaching decisions to ensure this result when cap room next year is more valued than your best effort now. I detect a slight whiff of rent dissipation: the cap creates rent for the owners, and the accountants dissipate it.
Taylor and Trogdon (T&T) wrote about the evidence of tanking in the NBA to improve draft status. The NFL's cap manipulation game provides an incentive for teams to not put forth full effort to win games.
Suppose your best player has will earn a bonus if he plays in the last game of the season and his team will win if he plays. If the value of additional cap room next year is greater than the value of winning the game, then there is an incentive to "rest" the player. Granted this is not an incentive to intentionally lose as documented by T&T, but it is an incentive not to win.