Abstract
In this chapter, we extend the real options model of player contracts to include three-year contracts. A longer contract adds greater complexity to a salary negotiation, however the model suggests that the option values decline in later years due to higher uncertainty of the available choices for players and team owners. Options have higher value for players whose productivity is expected to increase over the length of the contract, typically players at earlier stages of their careers. Veteran players closer to the end of their career have low option values and might find it difficult to negotiate a multi-year contract. We also explore the effects of no-trade clauses on negotiated salaries.
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Notes
- 1.
If \( p_{G} = p_{N} \) then this option value is just double the option value in (4.2).
- 2.
Marc Gasol entered the option year of his contract with the Toronto Raptors (NBA) in 2019. He chose to stay with the Raptors for his final season at a salary of $25.6Â million after finding no interest for a similar salary with another team. This was advantageous for Gasol, but perhaps not for the Raptors.
- 3.
Signing bonuses paid to players up front are amortized over the length of the contract for the purposes of monies toward the team salary cap in the NFL. Any team trading for a player must claim the remaining portion of the amortized signing bonus toward their salary cap, even the bonus money was already paid by the previous team.
References
Pedace, R., & Hall, C. (2012). Home safe: No-trade clauses and player salaries in Major League Baseball. Industrial Relations, 51(3), 627–644.
Rockerbie, D. (2009). Free agent auctions and revenue sharing: A simple exposition. Journal of Sport Management, 23(1), 87–98.
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Rockerbie, D.W., Easton, S.T. (2020). Extensions to the Put Option Model. In: Contract Options for Buyers and Sellers of Talent in Professional Sports. Palgrave Pivots in Sports Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-49513-8_4
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DOI: https://doi.org/10.1007/978-3-030-49513-8_4
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