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Free agents and the winner’s curse

2008 July 27
by Skip Sauer

Another Journal of Sports Economics article rates a feature in Kevin Lewis’ Boston Globe column, “Surprising insights from the social sciences.”

IN SPORTS, FREE agency has allowed players, especially star players, to earn dramatically higher salaries. This has been good for players, but it also means that team owners have to be smarter in their hiring practices. But are they? An economist examined performance and salary data for all hitters in Major League Baseball who signed free-agent contracts between 1985 and 2004. He found that many teams systematically over-estimated the predictive value of a player’s performance in the most recent season, relative to earlier seasons, in setting salary levels. This kind of error was especially acute for older players, and it was generally committed by teams who underperformed relative to their payroll (e.g., Tampa Bay vis-a-vis overperformers like Oakland).

Healy, A., “Do Firms Have Short Memories? Evidence from Major League Baseball,” Journal of Sports Economics (August 2008).

Also from Lewis’ column: it’s good to take an occasional day off from the razor, because the girls like stubble.

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