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A-Rod Discovers the "Yankee Premium"

2007 November 15
by Brian Goff

Three weeks ago Scott Boras stole the spotlight from the (flagging) World Series by announcing A-Rod’s intention to seek a new employer. Breaking news last night and today: A-Rod returns to New York for roughly the same amount.

View #1) Boras/A-Rod were gaming the Yanks all along. If so, they aren’t good game players.

View # 2) Offered by some guy on Dan Patrick’s Fox Sports Radio show today — A-Rod’s followed his heart back to NY. A-Rod and emotion? Maybe the guy was Scott Boras.

View #3) Expressed by Dan Patrick — A-Rod and Boras tested the market and quickly figured out that no team would be offering anything near the Yanks. Bingo!

View #3 fits with my post on the Yankee Premium (June 2005). Yankee players near their prime can’t expect to receive anything near their Yankee salary unless they find a totally insane owner. My premise is that the Yankees’ huge revenue advantage over the rest of the league does not all end up in the Steinbrenners’ pockets. Instead, players effectively capture large shares of this surplus (“rent”). One implication is that Yankee payroll figures hugely overstate the competitive abilities of their players. I did a quick comparison to similar players and estimated that among starters and top pitchers, the “Premium” doubled what the players skills were valued in the rest the market value.

While the idea and especially my crude methods for estimating the premium generated the most comments for any of my Sports Economist posts, recent Yankee signings offer strong confirmation of the basic idea The 36 year old Jorge Posada signed a deal worth $13 mil per year for 4 years. A 38 year old Mariano Rivera signed for an astonishing $15 million per year for 3 years, up from his prior $10 million. That’s a lot for a guy pitching 70 innings per year. Maybe the Yankees made poor decisions on the personnel, and maybe not. In either case, the amounts that they forked vastly exceed the market values of comparable (or even better) players. Top flight catchers with strong offensive numbers can be purchased in the $4-$10 million range. Rivera’s salary breaks down to about $70,000 per out. By comparison, Johan Santana made about $12,000 per out in 2006 and $20,000 per out in 2007 while Josh Beckett was around $12,000 this year. Yet, if Santana ends up with NY or anyone else for that matter, their salary will jump up to Yankee levels.

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