Yesterday I listened to a radio interview with Clete Boyer, a 3rd baseman for the Yankees and Braves in the 1960s. Boyer was a good but not spectacular player, who perhaps did not live up to his potential.
In discussing issues of his day, Boyer explained the origins of the term "bonus baby." When Boyer signed with Kansas City in 1955 for a $35,000 bonus, he became one. At the time, the rule stipulated that any player receiving a signing bonus in excess of $8,000 must be on the major league team's active roster.
Young players on major league rosters who would otherwise be in the minor leagues developing their skills were thus known as "bonus babies." The bonus rule was the reason they were on a major league roster. One can imagine that journeymen ballplayers were not fond of this rule.
Obviously, the bonus rule limited competition to sign young players. Most teams would only burn one or at most two roster slots on a player who was not ready for prime time. Nevertheless, relative to today's standards, the rule led teams to "rush" players into competition with more experienced elders.
More interesting perhaps are the economic implications of the rule. First and foremost, the value of a wasted roster slot inhibited teams from competing for prospects. This has the unambiguous effect of reducing the size of bonuses. The rule thus imperfectly restrained the salaries of prospects from exceeding those earned by veterans with greater value, but for whom there was no effective competition due to the reserve clause. (As with NCAA rules which restrict cash payments to players, you can be confident that there was some cheating here too.)
A side effect is that the rule spread young talent more widely across teams. But the Coase (or in the case of baseball, Rottenberg) theorem implies that the effect on competitive balance was transitory at best. Once players were seasoned, the market would allocate the player where his value was highest. So the principal effect of the rule was not to balance competition, but to reduce player compensation.