Is Wage Dispersion Just a Proxy for Ability Dispersion? Evidence from MLS
Joint with Dennis Coates
[Revise & Resubmit]
Does salary dispersion capture how unequally teams pay their players, or does it simply reflect differences in ability? The distinction matters because tournament theory predicts that larger pay gaps may strengthen incentives, while cohesion theory suggests that they may undermine cooperation. We use Major League Soccer team-season data from 2007 to 2023 and combine several measures of salary dispersion with measures of how concentrated player performance is within a team. We find that salary dispersion remains a significant determinant of team production even after accounting for performance dispersion, so it is not merely a proxy for differences in ability. Measures of performance concentration are also jointly related to team outcomes. In particular, teams perform worse when goals and assists are concentrated among fewer players, whereas concentrated fouls are associated with better performance. Overall, the results are more consistent with cohesion theory and show that both the distribution of pay and the distribution of on-field contributions matter for team performance.