Strategic Free Agency in Baseball

Abstract

This article investigates whether a greater supply of free-agent baseball players at a particular position has any effect on negotiated salaries. A simple auction model of free-agent salaries with many bidders is developed that suggests that a greater supply of positional free-agent players should lower the path of winning bids in sequential player auctions. A drop in the valuation of the marginal bidder in a sequence of player auctions also drops the path of winning bids. There may be an incentive to defer free agency by including an option year in a player contract. The effect of the number of free agents on salaries is tested using free-agent salary settlements for the 1997-2002 seasons.