Evaluating the economics of the MLB offseason

When it comes to trading, signing, and acquiring players in general, baseball might be the most complex game in the country. The rules and laws that surround the mere process of building a roster can not only bring people headaches, but may also take several hours to explain to anyone not already familiar with them.

At this very moment, the process of acquiring players during this offseason has been made further complicated by a serious economic issue: an unusually high supply of quality players coupled with low immediate demand for these said players. As a result, the 2017-2018 offseason is one of the coldest and most stagnant in baseball history, even with a strong free agent class.

Some of the best players in the game, including Jake Arrieta and Mike Moustakas, and some non-elite but still strong players like Alex Cobb, Lance Lynn, and Logan Morrison, still remain unsigned headed into Spring Training. Had I written this article last week, top-of-the-class players J.D. Martinez and Yu Darvish would still have been free agents. Even then, both Martinez and Darvish received what some considered “undersized” contracts given their skill level. Darvish’s contract is especially undersized compared to his pitching counterpart David Price. Two years ago, Price inked a deal with the Red Sox worth $217 million over 7 years, averaging $31 million per year. Darvish’s contract is $126 million over 6 years, averaging $21 million per year. The difference is not reflective of talent, as many feel Darvish is a much better pitcher than Price.

The question everyone has been asking is why is this offseason so slow and why are players signing contracts that some may feel don’t reflect their true value? As I said, there is a serious economic issue at hand. The answer can be found in the holy grail of economics: markets.

Many people argue that the reason the offseason was so slow is because the pay grade for players in currently inflated — the market needed to eventually correct itself. In 2000, the average player made about $1.9 million, with that number more than doubling to $3.9 million in 2015. Although revenues for teams is also increasing at a similar rate, the increase in salary will outpace the increase in revenue, if it hasn’t already yet. A significant portion of revenue comes from ticket sales. As teams purchase more expensive players, they need to compensate with higher ticket prices. The higher prices have already begun to drive people away from attending games. As a result, attendance has declined the past several years. One can hypothesize that the attendance rate will dip to the point where growth in revenue will slow. To search deeper into the problem, we need to ask what has driven this inflation.

The answer is in the comparative nature of contracts. When players become free agents, they need to carefully negotiate their contracts so that they can maximize their payday without using high price to drive teams away. Like any market, you lose buyers at higher prices and gain buyers at lower ones. However, for sports in general, the price of a player is heavily dependent on the player’s skill and supply at his position. So how do players determine a proper asking price? In the past, their agents compared them to contracts of similar players, then let teams go out in a bidding war. As a result of the winner’s curse, the winning bidder needs to overpay to win the player. A good recent example is the Albert Pujols contract. In 2012, the Angels signed him for ten years at $240 million. Although a surefire hall of famer, Pujols is not worth that much as a player, but the cost of signing him is worth that much. Notice the difference in wording.

Further complicating the matter is the supply of players at any given offseason. Because of competitive balance rules, we rarely find dynasties in baseball anymore. Baseball teams are more likely to experience 2-3 of powerhouse play, both followed and preceded by 2-3 years of being terrible. The San Francisco Giants are an excellent example. They won the World Series in 2010, 2012, and 2014, but have since been one of the worst teams in baseball. An even better example is the Royals, who had the best farm system in baseball earlier in the decade, then capitalized on that by winning a World Series in 2015, only to fall back to the bottom of the pack. Because teams are constantly fluctuating between being in the “win now” or “win later” states, their demand for players is volatile.

Let’s consider J.D Martinez’s situation this offseason. The power hitting outfielder is coming off a career year, and has posted excellent numbers the past several years. Unfortunately for him, nearly all of the teams in baseball that are in a “win now” state are loaded with outfielders. Although an elite player, the Dodgers, Yankees, Cubs, Indians, and Astros declined to express interest in Martinez due to their currently strong outfielders. These teams would only be interested in Martinez at a bargain price, which Martinez was unwilling to accept up until now. Only two teams, the Red Sox and Diamondbacks, expressed interest in him at all. Even then, the Red Sox are stocked in the outfield with Betts, Bradley Jr., and Benintendi, and thus intend to use Martinez as as a designated hitter. However, due to the Diamondbacks being a small market team, they could not financially compete with the Red Sox, leaving a lonesome one-buyer-one-seller market.

Some experts blame the sudden decrease in demand as a result of next year’s free agent class being one of the strongest of all time. The hypothesis is that teams would prefer to trade for players this offseason as opposed to sign them because they want to save money for next year’s class, which features Bryce Harper, Manny Machado, and Clayton Kershaw (if he opts-out). Either way, Martinez’s smaller contract was more a product of poor timing and bad luck than anything else.

However, there is even more economics at hand than so far discussed. Like any market, willingness to pay is heavily determined by income. In the case of professional baseball teams, many of them make enough to pay good player’s a substantial amount, but the luxury tax threshold severely deters teams from just doling out cash. The issue is that the increase in the average salary for players has not matched the increase in the luxury threshold. Thus, the cost of signing a player goes beyond his contract. Teams pay heavy taxes when they go above the threshold. In 2016, the Dodgers paid the most in taxes, forking over almost $32 million. To put that into perspective, Clayton Kershaw is the highest paid player in baseball per year at $33 million. The Dodgers could have added another all-star with that money.

As a result, teams have less purchasing power than their revenues might suggest, especially smaller market teams that simply can’t afford to go over the threshold.

The market corrected its inflation. Teams were no longer willing to overpay, since it simply wasn’t worth it (duh). The effect of the winner’s curse was erased. Because of this, many feel that the contracts Martinez and Darvish received were “what the market could bear” and were thus fair contracts.

But what inspired this to happen now?

Teams were done getting burned by bad contracts. Reconsider the Pujols contract. Pujols posted a -1.8 wins above replacement last year. In layman’s terms, he statistically made the Angles worse off by playing, a tough pill to swallow after being paid $24 million per year. Pujols has only gotten worse since signing, and the Angels are still on the hook for another four years.

Consider Jason Heyward. After never batting above .300 and only hitting more than 20 home-runs once in his career, the Cubs wrongly deemed him an elite player. They fell for the winner’s curse and over-signed him at $184 million over 8 years with a $20 million bonus. Since then, he has been absolutely atrocious both in the regular season and in the postseason. The Cubs will be forfeiting $23 million for the next six years for a player that didn’t hit his own weight in 2016.

As I mentioned before, teams all across baseball are simply tired of being burned by bad contracts. The lack of demand for the current free agent class was just the bubble finally bursting.

This will surely not happen next year, as the players in that free agent class are younger, better, and more primed to take on heavier contracts. Some say Bryce Harper may net a $400 million dollar deal over 10+ years. Only time will tell, as the market for talent appears to be a volatile one.

Leave a Reply

Your email address will not be published. Required fields are marked *