Free Agency and Contract Options: How Major League Baseball Teams Value Players

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Abstract/Contents

Abstract: When evaluating and signing players, Major League Baseball teams face incomplete information regarding a player’s true value. This paper explores how teams deal with such uncertainty and whether their approaches toward high-risk free agent signings and low-risk contract option decisions differ. I use seemingly unrelated regression to estimate the relationships between past performance and future performance and between past performance and free agent salaries. I find that in determining free agent salary offers, teams undervalue past performance relative to its power in predicting future performance. For the low-risk option decisions, I use the Wilcoxon Sum Rank Test and a logit regression to determine that teams are much less cautious and follow no discernible pattern in exercising options. Teams thus use very different approaches in making free agent and contract option decisions.

Type of resource	text
Date created	May 2007

Author	Dinerstein, Michael
Primary advisor	Hall, Bob
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	sports economics
Subject	salary determination
Subject	free agent
Subject	labor
Subject	management
Genre	Thesis

Location	https://purl.stanford.edu/cp727jr4022

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Preferred Citation: Dinerstein, Michael. (2007). Free Agency and Contract Options: How Major League Baseball Teams Value Players. Stanford Digital Repository. Available at: https://purl.stanford.edu/cp727jr4022

Stanford University, Department of Economics, Honors Theses

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