Long-Term Contracts in Major League Baseball

Abstract

Long-term deals are one tool that both players and franchises use to manage risk. That tool has been much discussed and empirically tested with respect to player shirking, and has more briefly, and only theoretically, discussed with respect to reducing variance in future payrolls. Our work looks at how patterns of use of long-term contracts are affected by changes in contracting rules established through collective bargaining and by expected changes in franchise revenue streams. To accomplish this, we have assembled the most complete dataset of MLB player contracts to date. We analyze changes in contract length and dollar value across players of different ability levels, at different points in their careers (contract status), by position, across CBA agreements, and further examine if new stadiums and new television deals impact contract terms. We confirm the earlier finding that player performance is systematically higher during contract years than during the early portion of a long-term contract. We also find that inclusion of contract length information significantly reduces the unexplained variation in player salaries.

Keywords: Major League Baseball (MLB), long-term contracts, player salaries and performance, collective bargaining agreements (CBA)

JEL Classification: J3, L83