Download This PaperRunning it Twice (or Thrice): Double-Header and Triple-Header Baseball Arbitration
MIT Sloan Sports Analytics Conference 2020
11 Pages Posted: 28 Apr 2020
Date Written: December 8, 2019
Abstract
Major League Baseball (MLB) uses final offer arbitration (FOA) to set the salaries of certain players. In FOA, the team and the player each submits a proposed salary number, and the arbitrator (in MLB’s case, a panel of three arbitrators) is required to select one of the numbers as the award. The rationale for FOA is that it incentivizes each party to submit a reasonable number so that it will be selected by the arbitrator, and if the submitted numbers are closer, settlement is more likely.
Although FOA has historically worked well in MLB, players have been critical of the process in recent years as teams have begun to use the process to their advantage. The root of the problem is that because the award is a binary choice, FOA results in too much variance with (potentially) million-dollar swings in the outcome. This high variance disadvantages the players, who are generally less willing than teams to take risk. It is much easier for teams to play for the long run and take “smart” million-dollar gambles because of their deeper pockets and the ability to spread risk over arbitrations with multiple players over multiple years. But, is there a way to level the proverbial playing field between the teams and players while maintaining the core benefits of FOA?
My paper answers in the affirmative by proposing a variation of FOA based on the probability theorem called the Law of Large Numbers and modeled after the “Running it Twice” poker procedure. My proposal — Double-Header Baseball Arbitration — plays out like regular FOA, except that two different arbitrators, independently of each other, decide which of the parties’ numbers to award. If both agree on a number, then that is the award. If they disagree, then the award is the midway point between the two parties’ numbers. In another variation, Triple-Header Baseball Arbitration, three arbitrators decide the case independently of the others. If all three agree on a number, then that is the award; but, if the arbitrators split 2-1, the award is set at the applicable two-thirds point between the parties’ numbers.
Keywords: final offer arbitration, baseball arbitration, Major League Baseball, MLB
JEL Classification: K4, K31
Suggested Citation: Suggested Citation