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The analysis in this paper shows that pay inequality within MLB teams has a negative effect on performance. The effect remains statistically significant even after controlling for total payroll. The result is the same as that of DeBrock et al. (2004) who use data from 1985 through 1998. My paper confirms their finding using the most recent data and using a different measure of pay inequality.
The fact that pay inequality leads to worse performance implies that managers should strive for pay equality in their teams. For example, instead of hiring two low-priced players and one superstar, performance may be better if three medium-priced players are hired. Given these results, it is surprising that there is not a more equal distribution of pay in baseball. One possible explanation is that managers may care about attendance as well as winning. They may be willing to sign up an expensive superstar who will attract fans even though it will increase pay inequality and may hinder performance.