Contract Length and the Return to Performance in Major League Baseball

Abstract

This article focuses on the relationship between contract length and compensation in Major League Baseball. Because the best players receive both the highest salaries and the longest contracts, wage regressions that omit length can lead to misleading inferences. Although contract duration is positively related with salaries, the authors find evidence of a negative relationship between contract length and a player’s return to performance. These results indicate some type of trade-off going on in the negotiation process that has not been identified in the previous literature on compensating wage differentials.

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“…Krautmann and Oppenheimer (2002) used free agents for their sample and found a positive correlation between contract length and salary, indicating that the players with the best performance not only obtained higher salaries, but also longer contracts. This study extends this analysis to players eligible for salary arbitration and players extending their current contracts.…”

“…As a result, the negotiation of these contracts has become more important to the players than ever before. Krautmann and Oppenheimer (2002) found that contract length and salary have a positive correlation. Moreover, they also found a negative correlation between contract length and a player's return to performance-the longer the contract, the lower the return to performance.…”

“…Some factors that have often undergone analysis are player performance, race and nationality, seniority, number of days on the disabled list, age, awards won, and selection for the All-Star Game; from the studies conducted by Scully (1974); Krautmann and Oppenheimer (2002); Krautmann, Gustafson, and Hadley (2003); Yosifov (2006); Holmes (2010); Link and Yosifov (2012);and Jane, Chen, and Kuo (2013). Only Krautmann and Oppenheimer (2002), Link and Yosifov (2012), and Meltzer (2005) analyzed contract length as a factor.…”

“…Using batters signing new contracts with the MLB between the years 1990 and 1994 as a sample, Krautmann and Oppenheimer (2002) used the two-stage least squares (2SLS) method to analyze which variables affected the first year's salary. After controlling for other variables, they found that the longer the contract, the higher the first year's salary, indicating that the best players received both higher pay and longer contracts.…”

“…According to Krautmann and Oppenheimer (2002), average days per year spent on the disabled list in the three years prior to signing the contract was the instrumental variable because a player who was easily injured might receive a shorter contract as an easily injured player tended to spend more time on the disabled list. However, a player who was injured is less related to salary.…”