Optionality in Australian Football League draftee contracts

Abstract

Though player drafts have commonly been utilised to equitably disperse amateur talent and avoid bidding wars, often they have also been accused of creating a monopsony labour market which restricts player movement. Within the Australian Football League (AFL) some have called for the increase of the initial draftee contract from two to three seasons, which further pushes the envelope on monopsony power. Instead of increasing the contract length, this paper suggests a call option to be purchased by the teams allowing them to add a further season to the draftee contract at a predetermined compensation package should they choose to do so at the end of the initial contract. The call prices per pick were calculated using the Black-Scholes model and were valued between 1% and 1.5% of the pick value. However, it failed to follow a monotonic function similar to pick value, owing to managerial overconfidence and sunk investment plays. Overall, the findings allow teams to procure the option of increasing initial draftee contracts and not impede further on a player’s ability to move.