Tag Archives: The economics of baseball

Baseball’s 1% Issue: Is it a problem? Part 1

23 Feb

All contract information from Spotrac and statistical information from Baseball-Reference

In his groundbreaking book on income and wealth inequality, The Economics of Inequality, Thomas Piketty writes about how, as industrialization has overtaken agriculture in the world economy since the Industrial Revolution, much of the world’s wealth has ended up in the hands of the few instead of the many.

Simply put, the top 1%, especially in the United States, keep getting richer and richer paydays as the bottom 99% makes less and less. Interestingly, the same trend is being seen in the MLB.

Since Spotrac’s salary rankings only go back to 2011, let’s take a look at the last five offseasons’ worth of contracts with regards to the performance of the players signed — a time period which happens to coincide with the most recent CBA. In that season, just nine players in the entire MLB were paid at least $20 million. Those players were Alex Rodriguez, C.C. Sabathia, Joe Mauer, Johan Santana, Mark Teixeira, Josh Beckett, Miguel Cabrera, Carl Crawford and Ryan Howard. Of them, one (Beckett) is retired and only Cabrera — and arguably Mauer — is still somewhat worth such a large price tag.

Screen Shot 2016-02-16 at 7.38.07 PM

Each year since, the number of $20 million+ AAV (average annual value) players has grown. Last season, 25 such players fit that description and, for the upcoming 2016 campaign, it’s 38. Obviously, we’ll exclude the 2016 signings in this analysis because the regular season is around 40 or so days away.

A big reason for the sudden spikes in these contracts is the deferred monies of many recent deals that spread out the financial risk for teams. Still, the point holds that in a more and more lucrative baseball landscape — thanks to revenue sharing and massive television rights deals — teams are willing to give more players more money than they ever have before.

It appears that as revenues for teams have increased, they — with certain smaller-market teams like the A’s and Rockies aside —  have decided to invest more and more of their money in fewer and fewer players.

But, is this an efficient strategy for value-maximizing teams?

In the 2015 season, for example, of the top 25 position players (by WAR), just one (No. 22 Miguel Cabrera) falls into the $20 million+ AAV category. The next $20 million+ player behind Cabrera was Adrian Gonzalez at No. 45 (4.0 WAR).

For pitchers, though, the picture looks very different. 4 of the top 13 pitchers (by WAR as well) made at least $20 million last season, not including 1 (David Price) who “only” made $19,750,000 in 2015 but signed a 7-year deal this summer giving him a $31 million AAV.

Let’s take a look at the last five seasons of data to tell if there’s legitimacy to this seemingly stark contrast between position players and pitchers with regards to return on value for highly paid free agents.

Note: In these seasons, multiple players (such as Johan Santana, Alex Rodriguez, Cliff Lee and others) missed entire seasons due to either suspension or injuries. Their WARs and salaries weren’t considered in the averages calculated for each season.

Screen Shot 2016-02-21 at 11.20.41 PM

As we can see here, the $/WAR calculations over the five-year span vary significantly, with the 2011, 2012 and 2014 values ($6,672,676.83; $6,603,846.42 and $7,450,902.49) clustered somewhere around $7 million per WAR, which is the commonly accepted range of how much 1 WAR costs on the open market.

In 2013 and 2015, the $/WAR values are north of $10 million, meaning that front offices generally didn’t get the values they paid for from their highly paid players in those seasons.

So what WAR values would we expect if players produced exactly according to their contracts, assuming 1 WAR is worth around $6.5 million on the market?

Screen Shot 2016-02-21 at 11.50.13 PM

Answer: In none of the seasons studied did the collective group of $20 million+ players outperform the common expectation for them. In other words, front offices — in general — essentially wasted money on highly paid stars for performance that, due to both injury and underproduction, was not at the level expected.

It’s true that this is a simplified view of the very complex salary/performance dynamic in baseball but the other variables affecting it are issues I would like to get into in future articles. But, this initial analysis at least gives us a few certain precepts:

  1. Front offices are spending more and more money on more expensive players each season. In addition to spending greater amounts of money on a greater amount of players, those players are getting more money in each year of the contracts they sign — often due to deferred pay structures. This means that players — who all mostly follow a similar aging curve — are essentially given consistent raises even as their performance declines (see Teixeira, Mark and Pujols, Albert). This is not indicative of a market which incentivizes high performance with more money and deincentives low performance with less money.
  2. The gap between actual WAR and expected WAR is increasing and is much greater now than it used to be, Does this mean front offices, now over 5 years from the 2011 CBA agreement, are more willing to overpay free agents to pre-empt the next CBA, as the current one expires in December 2016? It’s possible that teams could be content to gain extra years of control for higher up-front payments to lock in contracts through the next agreement, but that is something to be studied in a future article.
  3. It’s a players market right now. Outside of the rare Kershaw/Greinke/Felix Hernandez, not many of the players included in this analysis outplayed a $6.5 million/WAR valuation of their contract. I hypothezise that most teams — this is another topic for further analysis — get the highest value per dollar on the second- and third-tier players that aren’t bringing in $25 million a season.

So does baseball have a 1% problem that’s as troubling as the one facing the US — and world — economy right now? It remains to be seen, but it appears it’s certainly possible. If salaries continue to rise — they will — and more players start to cross the $20 million AAV threshold, teams likely will continue to lose value per dollar. Does this mean teams should start implementing internal redistributive properties to better allocate their resources? That’s a question for next time.