A salary cap is best defined as a limit that teams can spend on player contracts. There are two types of salary caps a hard cap and a soft cap. A hard cap does not allow a team to exceed the limit for any reason. An example of a league that uses a hard cap is the National Football League. A soft cap has exceptions which allow teams to exceed the cap for certain reasons. The National Basketball Association is a league which has a soft cap. For this paper we will be looking at how a hard salary cap would affect parity in Major League Baseball. There would also be a minimum salary limit. This means that every team in the league would have to keep their payrolls below a certain amount and above a certain amount. By also having a minimum salary teams would not be able to put together a team that essentially cannot compete because payroll was kept low in order to maximize profits. .
The criticism that the New York Yankees organization hears about every year is that they are essentially buying a championship when they have a payroll that is much higher than anybody's in baseball. The Yankees payroll was 156 million last year compare that to the team with the second highest payroll the Los Angeles Dodgers at 115 million and it is easy to see that the Yankees are able to spend much more money on their team than any other organization. Then compare the Yankees payroll to the lowest 21 team payrolls and the Yankees payroll more than doubles any of these teams. This shows that teams on the high end of payroll have much more money to work with when signing players to play on their teams. However our measure of competitive balance focuses on whether the salary cap would be able to allow all teams, particularly teams with the bottom ten payrolls to be competitive or would it have no affect or would it make the situation that exists worse. To proceed we must introduce our production function.