The Sports Economist

Guest Post by John Budd

Previous research on Major League Baseball’s final-offer salary arbitration process has found that players who lost in arbitration have subsequent lower on-field performance than those who won in arbitration. But what about simply going to arbitration rather than reaching a negotiated settlement? Does having a hearing and a new salary imposed by an arbitration panel affect player performance or the player-club relationship?

The conventional wisdom in dispute resolution indicates that arbitration should have negative consequences because the participants lose control of their own destiny, can’t tailor agreements to their liking, and feel less ownership in the process and the outcome. In 1974, Minnesota Twins pitcher Dick Woodson won the very first arbitration hearing but was traded to the richer New York Yankees less than three months later. The ability to tailor contractual outcomes to the fit the parties’ preferences can be constrained by the arbitration process. The arbitration process is also adversarial and the player hears all the reasons why the club feels he does not deserve the salary he is requesting. So this conventional wisdom predicts that players who reach a new salary agreement voluntarily will have better subsequent on-field performance and stay with their teams longer than players who have a salary imposed by the arbitration process.

But what happens in practice? This is the focus of our research article “Are Voluntary Agreements Better? Evidence from Baseball Arbitration” (John W. Budd, Aaron J. Sojourner, and Jaewoo Jung, forthcoming in Industrial and Labor Relations Review). To analyze these questions, we look at 1,400 salary re-negotiations between 1988 and 2011 that all involved exchanging salary demands prior to a potential arbitration hearing. Of these, 83% reached a negotiated settlement prior to an arbitration hearing and the remainder were settled via arbitration. We only include those who exchanged offers to try to remove as much heterogeneity as possible. In multivariate analyses, once we control for prior player performance, we do not find any statistically significant differences in on-field performance in the year immediately following arbitration. This might be due to players’ career concerns. Most arbitration-eligible players are early in their careers and their on-field performance is visible to other clubs. So a player has an incentive to set aside any residual feelings from the dispute-resolution process and to perform at a high level in order to position himself for subsequent contracts.

But there are not the same incentives to display positive behaviors in dimensions of performance that are harder for other clubs to see, such as clubhouse attitude. Indeed, in contrast to a lack of differences in on-field performance, we find that players who go to arbitration are significantly less likely to still be with the arbitration team at the end of the season—win or lose. In fact, even after controlling for prior player performance and other factors, arbitration nearly doubles the likelihood of a player not being with the same team at the end of the season. It seems unlikely that this result can be explained solely by clubs’ financial concerns. Start with the clubs that lose in arbitration. They might trade or release players because they are forced to pay more than they wanted, but even this isn’t clear because research has shown that arbitrated salaries are less than players’ market value. Even if we allow this to explain the effect for clubs that lose, what about clubs that win? In this case, it is hard to see how a purely financial reason would explain the result that the relationship is less durable because the club is paying less than they wanted. One might think that an arbitration-winning club might still look to trade a player if the club thinks it will be harder to retain the player in a future contract negotiation. But this implies a perception that some element of their relationship has been weakened by the arbitration process, either because of the adversarial nature of the process or the inability to tailor agreements to their liking. An arbitration-winning club might also trade or release a player if it expected or observed reduced player performance. We do not find performance differences observable on the field, but there could be differences in performance along dimensions that are hard for other teams (and us) to observe, such as clubhouse attitude.

One interpretation consistent with the pattern of results is that the arbitration process harms the player-club relationship and negatively affects player behaviors that are hard to observe (e.g., clubhouse attitude, loyalty to the team), but career concerns and/or loyalty to teammates and fans causes a player to continue to publicly perform at his usual level. This negative effect on the player-club relationship could also explain why there have typically been very few hearings in recent years.