Do You Get What You Pay for? Salary and Ex Ante Player Value in Major League Baseball

Abstract

The last few years have seen a resurgence of very long, very expensive guaranteed contracts in Major League Baseball. Commentators who examine the outcomes of earlier long-term contracts generally conclude that teams greatly overpay in these situations. These assessments suffer from the use of perfect hindsight, however. In this article, we estimate the economic gain that could be anticipated at the time of signing of a contract. We forecast the player’s expected future productivity in terms of winning based on recent performance at the time of the contract signing and adjusted for player aging. We translate this expected performance into a stream of expected marginal revenues using estimates of the team-specific value of a marginal win and discount these to present value at the time of signing. The economic cost of the contract to the team is measured by the discounted stream of guaranteed future salaries across the contract horizon. Comparing these benefits and costs indicates that teams overpay on average and more so for longer contracts. Some part of this is likely explained by benefits beyond the effect of games won.