Economic Analysis of baseball contracts

Baseball Prospectus (linkrot)

Baseball Prospectus breaks down the 47 free agent contracts signed over the 2004-2005 winter. The math is too complicated to explain without quoting most of the (subscription-only) article; basically they estimated how good the players in the free agent class of 2004-2005 were, and counted how much money they were paid, and then figured out which of those players were underpaid or overpaid, relative to the group. Other adjustments included discounting multi-year contracts by 5% per year and comparing the players to “replacement level” (the quality of player you can get by paying the minimum $316,000/yr salary) instead of to zero.

The three best deals:

  1. Guzman, Cristian, signed a 4 yr/$15mil contract. Projected to win 14.7 games. By BP's estimates, underpaid by $17 million.
  2. Drew, J.D., 5 years/$40 mil. Worth 29.1 wins, and underpaid by $14mil.
  3. Eckstein, David, 3 years/$9 mil. Worth 10.2 wins, so underpaid by $13mil.
The worst deal:
  1. Ordonez, Magglio, 5 years/$67 mil. Worth 16.4 wins; overpaid $32 mil.
Dodger fans will be interested to learn that Drew is projected to win more games than Beltre in the next five years, and at a substantial discount. (29.1 wins vs 28.2; $40mil vs $57mil). Overall, the Dodgers were the second most efficient spender in the market (Drew and Kent were both very good deals; Lowe and Perez were both mildly bad deals). The Mariners, Diamondbacks, and especially Tigers overpaid the worst.

Also interesting is that this market put the value of a projected win at $2.14 million, which is double the current estimated value of a win. That is, looking at the revenue and records of the different baseball teams, BP statheads have determined that winning one extra baseball game is worth (other things being equal) a million dollars in gate revenue, TV contracts, etc. Therefore, paying a player up to a million dollars per projected win is good economics. By that measure, almost all of this years free agents were overpaid. Which is not unexpected; baseball players are indentured servents for the first six years of their major-league careers, during which period they are severely underpaid relative to the money they generate for their employers. By limiting free agency to veterans, the owners have ensured that free agents are almost always overpaid.