Measuring Managerial Efficiency: The Case of Baseball

Abstract

In economic analysis the role of the entrepreneur is paramount to the production process. The entrepreneur is engaged in a Darwinian game of efficiently transforming scarce resource inputs into outputs. In the modern business organization this role is delegated to managers. Despite the conceptual importance of the role of management in the production function, very little is known about the actual effect on output of variations in managerial skill. In part this is due to the lack of proprietory data. In part it is due to difficulties in measuring the outputs and inputs of complex production processes in a meaningful way. A number of investigators have employed the concept of the frontier production function, as developed by Forsund and Hjalmarsson [1] and Timmer [6] and more recently by Schmidt and Lovell [3], to measure the effect on technical and price efficiency of various property rights structures or institutional constraints. To our knowledge estimates of managerial efficiency have not been obtained with firm specific data, except for some regulated industries. In this study we estimate managerial efficiency by manager and by firm, managerial marginal revenue product, the rate of change in managerial efficiency over years of experience and relative factor price efficiency. We use major league baseball teams over the period 1961-1980 as our data source. What is particularly appealing about the choice of major league baseball teams as the industry for analysis is that outputs (win percent) and inputs (player skills) are unambiguously measured, and the production function is simply specified, as shown by Scully, [5]. Our results indicate that managerial skill in baseball contributes very substantially to the production process. The paper will evolve as follows. First, the concept of the frontier production function is briefly outlined. Then, estimates of managerial efficiency by manager and by team are provided and discussed, a managerial efficiency learning curve is estimated, an estimate of managerial marginal revenue product provided, and the managerial efficiency