Question

From an accounting perspective, college athletic departments are rarely self-sufficient yet coaches’ salaries increase year-after-year. Apply economic perspectives to explain this seeming dichotomy.

Answer 1

There are two economic perspectives we can look at to explain the dichotomy:

1. Opportunity Cost: From an accounting perspective, the athletic department coach is just coaching and are being paid for their contribution. The accounting perspective ignores the concept of opportunity costs. Opportunity cost refers to the cost of the next best alternative that is foregone when one takes a decision. In this case, the opportunity cost of coaching at the college department can be very high for the coaches. Had they not been coaching at the department, they might be coaching somewhere else - A national team, a regional team, some private athletic clubs or maybe independent one-to-one trainers as well. Note that, from an economic perspective the coach salary must increase year on year as their opportunity cost is also going up year over year. Thus, the salary of the coaches growing year over year at the department is justified irrespective of the fact that their department is rarely self-sufficient.

2. Positive externalities: Coaching can create players who can later represent the college. Such athletes trained by coaching help society grow. They spill over positive externalities in the economy which are often not accounted for by the accounting perspective. The positive externalities spillover by the coaching given by the trainers explain why coaches' salaries must grow year over year.