On February 19th, the Australian Football League (AFL) handed down the third biggest fine in its history of $500,000 to the Melbourne Football Club. The fine was the result of a seven month investigation into allegations the club took deliberate action to lose matches toward the end of the 2009 season. This was done to guarantee priority draft picks under the draft arrangement that favours poorly-performing teams. Two coaches found to have been complicit were also handed down lengthy suspensions. Deliberately losing games is colloquially called ‘tanking’, and has been a subject of discussion for AFL pundits for nearly a decade. The football community has reacted to these sanctions with bemusement, and rightly so. The club is being heavily penalised for what is ultimately a rational response to the perverse incentive the AFL unwittingly designed.
In economics, a perverse incentive is an incentive that produces an unintended and undesirable consequence. In designing a system in which the teams that finish down the bottom of the ladder are granted the earliest draft picks in the end of season draft, the AFL is attempting to foster a fair and even competition. This is a noble cause. The last thing we should be doing is lambasting the AFL for attempting to act in the interests of the paying fans. The core issue is that designing the draft system is at heart, a trade off between keeping the league clean and competitive, versus promoting equality and fairness. In economic terms, it is an efficiency versus equity dilemma that is weighted too heavily toward equity causing undesirable and unintended consequences. The perverse incentive here is clear; in the right circumstance there is a reward for losing which will outweigh the reward for winning. It could not be more contrary to the interests of the paying fans.
The problem is quite simple. Once a team realises it cannot make the finals and therefore has no chance of winning the premiership, it has virtually nothing outside experience and dignity to play for. In this position, it appears that teams begin to look at the teams around them on the ladder and adjust their behaviour accordingly. Coaches of a club consider the marginal benefit versus the marginal cost of losing or winning each of the remaining games. This can mean seemingly small differences in allocated draft picks. However, in recruiting young AFL players, small differences are significant. The first few players are often guaranteed stars, but it drops off quickly and even from around pick four onwards, it can become a gamble. If the benefit of deliberately losing is a higher and more important draft pick than would otherwise be, and the opportunity cost of losing is simply further loss of face in what has presumably been a humiliating season anyway, rationality will always prevail.
Possible solutions to this problem are not so simple. Changing the arrangement and increasing the opportunity cost of deliberately losing sounds easy enough, but each possible alternative comes with its own problems. The National Basketball Association (NBA) in the US has a system in which the teams finishing down the bottom are not guaranteed the best picks in the draft; rather they have a better chance than that of teams above them of receiving those picks in a draft lottery. This is no doubt a better model, but it is not perfect. The benefit of losing in such an arrangement would be a small gamble as opposed to a definite outcome. Therefore, depending on the audacity or prudence of the coach, losing may still appear rational.
Possibly the best model to negate this perverse incentive is that of the English Premier League (EPL). This may sound strange, as they don’t actually have a draft, but it is their relegation system which dramatically increases the opportunity cost of losing games towards the end of a season. In the EPL, the bottom three teams at the end of each season are relegated to a lower division. This is a massive cost on the club – fans lose interest, merchandise sales drop and revenue tumbles. Often the better players leave for clubs that have remained in the top division. No club would rationally want this, as suddenly a spot or two better in the draft would seem totally insignificant. The only, albeit significant, logistical difficulty of such an arrangement would be assembling an AFL second division. Furthermore, unlike the EPL, the AFL and its fans like a competition that can see teams rise, fall and rebuild in a matter of a few years. A relegation system substantially lowers the mobility of clubs and this solution may well be overreach towards efficiency in the trade-off.
It is important to keep in mind that it is highly unlikely that the findings against the Melbourne Football Club are an isolated incident. A previous assistant coach from Carlton Football Club has made claims that Carlton ‘tanked’ to gain the number one pick in 2008, and similar allegations have been levelled at Richmond Football Club. It may seem that harsh punishments can serve as a deterrent and that we should be able to rely on clubs to act with integrity. However, unless the costs always outweigh the benefits of deliberately losing, there will inevitably be someone willing to take action. It is a real-world example of the economic concepts of efficiency versus equity and perverse incentive. Designing the draft model is essentially a balancing act between making the league fair and equitable without having the efficiency and competitiveness compromised by undesirable side-effects. We should be supporting the AFL in their efforts to promote an even and equitable league, however there is no silver bullet, and the current arrangements are ill-conceived and in need of reassessment.