Does Baseball’s Salary Arbitration Process Reduce Player Performance and Weaken Player-Club Relationships?
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.
“When a key responsibility of a manager is to allocate more or less attractive tasks, subordinates have an incentive to work hard and demonstrate their talents. As a new manager is less well informed, management dismissals reinvigorate this tournament competition—but only in sufficiently homogeneous teams. We investigate this hypothesis using a large dataset on dismissals of soccer coaches, whose main task is indeed the selection of players. We find that dismissals enhance performance (only) in homogeneous teams. Moreover, we show that there is typically a negative selection bias when evaluating succession effects, which reconciles previous contradictory findings. (JEL D22, J44, J63)”
That is from a newly-published article in the April 2016 issue of Economic Inquiry. The title of the article is “The Impact Of Managerial Change On Performance: The Role Of Team Heterogeneity” and it’s authored by Gerd Muehlheusser, Sandra Schneemann and Dirk Sliwka.
Cross posted at Market Power.
I wrote a short article for the Washington Post’s “In Theory” blog and it was published today. Here is the link.
When I read manuscripts submitted to or published in economic journals, it is not uncommon for authors to report the standard deviation of binary dummy variables (dummies with values equal to 0 or 1). I’m interested in the TSE’s readership take on whether reporting these standard deviations is useful.
Call for Papers – Missouri Valley Economics Association Conference in Kansas City – Extended Deadline
Michael Davis and I are arranging North American Association of Sports Economists (NAASE) – affiliated sports economics sessions for the 2015 Missouri Valley Economic Association (MVEA) conference in Kansas City, Mo. this October. The conference runs from October 22nd through October 24th. and will be held at the Kansas City Marriott Country Club Plaza. The deadline for submitting papers has been extended to August 28th, 2015.
If you have a sports economics paper you would like to propose to present, please email me or Michael a title, a brief abstract, and full contact information including affiliation, email address, mailing address, and phone number. Michael’s email address is firstname.lastname@example.org and my email address is email@example.com .
Here’s a link to the general call for papers for more information about the conference.
Michael Davis and I are arranging North American Association of Sports Economists (NAASE) – affiliated sports economics sessions for the 2015 Missouri Valley Economic Association (MVEA) conference in Kansas City, Mo. this October. The conference runs from October 22nd through October 24th. and will be held at the Kansas City Marriott Country Club Plaza.
Papers presented at the MVEA conference can be submitted to the MVEA’s peer-reviewed journal, The Journal of Economics, MVEA for $25, half off the normal submission fee. In addition, the MVEA gives a cash award for the Best Graduate Student Paper, so graduate students are encouraged to submit a paper proposal.
If you have a sports economics paper you would like to propose to present at this year’s MVEA conference, please email me or Michael a title, a brief abstract, and full contact information including affiliation, email address, mailing address, and phone number. The deadline for submissions is August 14th. Michael’s email address is firstname.lastname@example.org and my email address is email@example.com .
In January, Cubs fans were told this:
The Chicago Cubs and Tribune Broadcasting’s WGN-TV today announced a new 5-year agreement under which the local station will televise 45 games annually beginning with the 2015 season. This new agreement continues a broadcasting partnership that spans more than 60 years. Specific terms of the agreement were not released.
I get WGN via DirecTV and have been able to watch Cubs games on WGN in the past when they’ve been scheduled. However, that’s not the case this year. Today on WGN they are showing a movie called “Out of Sight” even though the Cubs vs. Reds game is scheduled to be on WGN.
Luckily, I have the MLB.TV package and can watch the game. It’s on right now and the WGNSports logo is on the scorebox that is shown throughout the game, but the game is not being shown on WGN on DirecTV at my location.
Do any readers know a reason why I (a person who lives in Minnesota) cannot receive the Cubs broadcasts on WGN via DirecTV. Are they only shown locally on WGN in Chicago?
Growing income inequality may be one of the most important economic issues of the next several decades. Despite a growing concentration of income and wealth, however, it seems that no one is willing to actually call themselves or anyone else rich.
Take this story about the magnificent Stephen Curry from EPSN’s Grantland, for example. Stephen, the son of NBA star Dell Curry, has his childhood described in this way,
…the house his parents built in 1996, the year Steph turned 8, on a 16-acre plot a few minutes’ drive from the center of Charlotte, North Carolina. It’s a big house, six bedrooms. Steph’s father, Dell, played shooting guard for the local NBA franchise, the Hornets, and a couple of years earlier he’d won the league’s sixth man of the year award; the Currys saw this as their dream home, designed it themselves, had cabinets flown in from Africa… still, it’s possible to imagine the Currys’ life there, the upper-middle-class childhoods resplendently sprawling over the place.
Upper-middle class? Seriously?
By the time Curry’s family built the house in 1996, Dell had already earned over $7 million from a basketball career that would eventually make him nearly $20 million in salary alone.
The median worker in the US earned $272,533 over the 14 years during which Stephen’s dad played in the NBA, or roughly 1/72nd of what Dell Curry earned.
Stephen had an extremely privileged childhood that 99.9% of kids can’t even dream of. Yes, he was, say it together, rich. This doesn’t take away from the fact that he used the advantages of his birth to become, perhaps, the best player in the NBA.
But Stephen Curry, upper-middle class kid? Please…
In a setback for Mankato and North Mankato’s effort to extend their local sales taxes, a key legislator has stripped the regional athletic facility spending from the House version of the bill.
Rep. Steve Drazkowski, R-Mazeppa, said Tuesday his fellow Republicans wanted to stop the proliferation of sales tax-funded athletic facilities.
Cities such as Rochester, St. Cloud and Marshall have used sales taxes to build ice rinks, gyms and other athletic amenities.
Drazkowski, chair of the property tax and local government finance subcommittee, said Rochester’s use of the sales tax generated “outrage,” especially among visitors who came into the city to shop. He said cities end up “taxing neighbors to provide themselves a big athletic facility.”
Dr. Bill McGuire, who owns the Minnesota United FC, said the group is seeking a property tax exemption and a sales tax break on construction materials for the new stadium near the MinneapolisFarmers Market. The new stadium would host about 20 professional games a year.
The ownership group would pay $30 million to buy the land, a $100 million franchise fee and $120 million to build the new, open-air stadium.
Despite the tax exemptions — which could amount to $3 million in the case of the sales taxes — McGuire characterized the deal as having “no public subsidy whatsoever.” The amount of deferred property taxes had not been estimated.
“No public subsidy whatsoever” may be technically true, but a property tax exemption and a sales tax break on construction materials would qualify as an implicit subsidy.
Here’s a link to new working paper by Alma Cohen, Nadav Levy, and Roy Sasson. Here is the abstract.
When agents face a risk of termination by the principal in the short term, they may under-invest in projects whose results would be realized only in the long term. We use data on decisions made by NBA coaches to study how risk of termination by the principal affects the behavior of agents. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA’s 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse.
Thanks to Lucian Bebchuk for the pointer.