Home Safe: No-Trade Clauses and Compensating Wage Differentials in Major League Baseball

Abstract:     
In this paper, we examine the compensating wage effects of no-trade clauses in Major League Baseball player contracts. Under current rules, no-trade clauses insure players against risks associated with involuntary movements to undesirable teams. Since there is an abundance of individual performance, team characteristics, and contract information for this labor market, it provides an excellent opportunity for testing compensating wage differentials. Using an accepted player salary equation and data from the 2003-2008 seasons, we find evidence that there is a significant trade-off between monetary compensation and the risk reduction provided by the inclusion of a no-trade clause in a player’s contract.

Keywords: compensating wage differentials, non-monetary benefits, no-trade clause, performance and compensation

JEL Classifications: J31, J44, M55

Working Paper Series