Abstract
This study looks to understand whether the inclusion of optional years on Major League Baseball player contracts impacts player performance. Contract options are a feature included in about 13% of new contracts given to batters from the years 2009 to 2017. There are four common types of option: club, mutual, player, and vesting. How an option affects incentives for player effort will likely depend on the type of option. It is likely that effort will be disincentivized when the team has the final decision on whether to exercise the option. This prediction is tested empirically. The results suggest that having a club or vesting option leads to diminished performance by players.
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Notes
Players can generally be divided into three groups based on MLB service, the term given to professional experience. Players with less than 3 years of service can only receive contract offers from their current team, typically the team that selects the player in the MLB draft, and the player cannot negotiate for a higher offer. These players are paid at or near the league minimum and typically receive one-year contracts. No players with less than 3 years of service from 2009 to 2017 have a contract with an option. Players with between 3 and 6 years of service are arbitration eligible. While these players cannot receive outside offers, if the player feels his offer is not fair, he and the team can enter into arbitration overseen by a third party. Players with greater than 6 years of service are eligible for free agency, where all teams can make offers to the player (Baseball Prospectus 2009-2018a).
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Acknowledgements
I would like to thank Dr. Mindy Marks for her extensive feedback on this work. This work also benefitted from comments from seminar attendees at Northeastern University.
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Paulsen, R.J. Contract Options and Performance: The Case of Major League Baseball. Atl Econ J 46, 379–388 (2018). https://doi.org/10.1007/s11293-018-9595-5
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DOI: https://doi.org/10.1007/s11293-018-9595-5