The Rocket’s Arbitration Request

Roger Clemens has set his final offer at $22 million in this year’s arbitration showdown. The Astros countered with $13.5 million, an $8.5 million difference. That’s huge – all the way around! For pitchers, his final offer is by far the largest one ever made and the Astros’ final offer ties the largest offer made by any club to a pitcher. In comparison, the (2003) Braves offered Greg Maddux $13.5 million and Maddux countered with $16 million – the largest pitcher and team offers up until now. In terms of differences, the difference between the offers in the Clemens case is more than 2.8 times the next largest difference for pitchers ($3 million between offers in Eric Gagne’s case in 2004).

When economists model an arbitration system, one of the first things they model is how arbitrators make their decisions. For a final-offer arbitration system such as baseball’s, arbitrators are assumed to form a “preferred settlement”, some outcome that the arbitrators find “optimal” and that they would impose if they could. But since the arbitrators must choose one of the final offers as the binding settlement, it’s reasonably assumed that arbitrators choose the final offer that is closest to the preferred settlement.

Should a case go to arbitration, how do arbitrators gather the information to determine this preferred settlement? One way is through an arbitration hearing when both sides make their cases. Another way is just by looking at the final offers. Presumably, both sides have some private information about their cases that the player and team statistics don’t reveal. But the final offers may reveal some of this private information to the arbitrators. But if a player’s final offer seems unusually large or his team’s final offer unusually small, the arbitrator may discredit the final offer. Moreover, such an extreme final offer may make it more likely that the arbitrators will pick the other side’s offer. As such, this arbitrator behavior should provide incentive to both sides to set a reasonable final offer.

Is the Rocket’s offer unusually large and unreasonable? In 2004, according to the USA Today salary database, the 5 top salaries earned by pitchers averaged $15.96 million and ranged between $17.5 million (Pedro Martinez) and Mike Hampton’s $14.625 million. The Big Unit and fellow AARP candidate to Rocket, Randy Johnson, earned $16 million. The Astros’ offer, while smaller, is closer to this range.

So what’s Clemens doing? He may well be making a reasonable offer. On the other hand, he may be taking a gamble. The differene between the offers makes it more likely, all else equal, that the case will go to arbitration. But, heck, if he doesn’t like the outcome of the arbitration process, he can retire (presumably for good). If he does like the outcome, then he’ll be back to pitch for the Astros. Shoot, I wish I had the choice to leave umpteen million on the table!

What if the Astros can’t afford to pay the Rocket $20 million? Since team finances, at this point in the game, are not allowed to play in the arbitrators’ decision, well, tough doo doo. Whatever arbitrators decide (should it go that far), both sides are bound to it. That’s a chance that the Astros have to take.

It’s good to be the Rocket.

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Author: Phil Miller

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