Accounting Theory for Baseball Contracts

baseball-1091211_1920As baseball season, or what I like to call my favorite time of the year, rapidly approaches I want to write about something I have thought a lot about regarding contracts for athletes, especially baseball players.  Baseball, unlike other sports, is unique in the way they approach free agency, players have a service time clock that keeps them from entering the free agent market where they can capitalize on their hard work.  Without going into the details of service, which can be extensive, simply put a team has the exclusive rights to a player for the first six years (in service times year, roughly 172 days) he is on the MLB roster.

So what happens when they actually hit free market, if they are in the upper echelon of players they will command a price tag upwards of $20 million per year.  Sometimes a player will sign a long term contract with a team before he has reached the 6 full years of service time.  This is a win for both the team and the player, he can capitalize on 3-4 years of solid performance and get a hefty guaranteed contract well before he normally would, instead of playing for mere pocket change.  Arbitration after a little more than 2 years of service time can provide a salary between roughly $900,000 upwards of $8 million, but this is a small percentage of what they would earn if they were to get market value.

As we have seen in the past players and teams come to terms well before free agency to keep a player around on that team a lot longer, for example the St. Louis Cardinals gave Albert Pujols a $116 million contract for a 7 year period well before he was a guarantee to perform as he did for more than a decade in St. Louis, in retrospect we can easily say he was worth every dollar, plus even more to the Cardinals in terms of the revenue they gained based on his production.  The problem at the root of this blog is what should happen to players who have never hit free agency, spend their entire career with one team, and are nearing the end of their careers where they do not produce as they had in their prime?

In my opinion (which will not be popular I’m sure) this presents a unique opportunity for teams to compensate players after the fact for the economic value they provided above what they were expected to.  Basically, for a lack of a better term, a ‘nostalgia premium’.  Should the player receive an amount significantly above market value, not necessarily, but should the team be willing to pay at least, if not more, than the highest bidder, absolutely.  In my eyes this is like the goodwill provided from one company buying another, the fans are pleased because this usually keeps around a fan favorite, and the team is rewarded by the fans loyalty through continued revenue.  This is the antithesis of the perceived ‘home team discount’ that players are supposed to give a team that has kept them their entire career up to that point.

Obviously this is not the perfect situation for teams trying to compete and tight on funds, but if they truly recognize the economic value of what is basically an asset, they should absolutely compensate it as such.  Because of the awkward nature of how baseball players are compensated, many of them will be trying to receive a contract after their best performing years have passed, eliminating them from receiving the true market value of the product they provided.

Side note to this, I believe service time requirements should also be renegotiated in the players favor during the next collective bargaining agreement, as to eliminate the lengthy time a team has contract over a player potentially in their prime.

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