April 29, 2010
Ahead in the Count
The Source of the AL's Superiority
There is no ambiguity about the fact that the American League is stronger than the National League. Pretty much everyone has come to understand that the talent level is simply higher in the junior circuit, as players' statistics have routinely declined when they move from the NL to the AL, and improved when they have moved from the AL to the NL. American League teams have dominated National League teams in interleague play, too.
In this article, I am less focused on how much better the American League is than the National League. Clay Davenport can do that far more accurately. His league adjustments, which are the primary difference between WARP1 and the newer WARP2 and WARP3 indicate that National League teams had an average WARP3 of 40.2 over the last two years, while American League teams had an average of 42.9. Thus, he has estimated that the talent level appears to be about 2.7 wins higher per team. That seems reasonable enough. Instead of looking at how much better the American League is, I am focused on why it is so much better. The reasons are less than intuitive. If you ask the average fan why the AL is superior, he will tell you that it's because of the Yankees, or maybe because of both the Yankees and the Red Sox. I actually agree with this assessment to a point, but the implication of this statement if you tease out the thinking behind it is that the Yankees and Red Sox spend more money on free agents than other teams, and so those teams end up superior as a result.
The initial evidence would appear to support this theory. The average American League payroll during the last two years was $102.8 million, while the average National League payroll was $91.1 million. Subtract the Yankees, though, and the average of the rest of the American League was $93.7 million. However, that is misleading. For the line of reasoning that the Yankees and, to a lesser extent, Red Sox, make the American League superior to be true, both leagues would need to draft and sign equivalent levels of amateur talent, but the talent level would need to diverge after players reach free agency. Revisiting my article from last month, The No Turnover Standings, we can actually look at the average talent level of the amateur players at a league-by-league level. In this case, we find the opposite of thes claim to be true. The average WARP3 of players originally drafted or signed amateurs by National League clubs over the last two years was 39.2, while the average WARP3 of players drafted by American League teams was 43.9. If anything, the turnover for players has actually moved the talent towards the National League instead of in the other direction.
I recently introduced the concept of Non-Market (NM) WARP3 to describe the contribution of players who had been signed as amateurs and had less than six years of major-league service time, and Auction-Market (AM) WARP3 to describe players with over six years of service time or free agents from Asian countries who were already professionals and had been bid on in auction format. I have averaged the values of teams in each league in the table below. I also include the breakdown of players who have not yet reached arbitration eligibility and still receive the league minimum salary (M), players who have reached arbitration eligibility but are not yet eligible for free agency (A), players who are eligible for free agency (F), and players who come from professional leagues in Japan and other Asian countries (J).
Note that National League teams are actually getting slightly more from Auction Market talent. Instead, the marked difference between the leagues is in the gap in Non-Market talent. This shows that the real separation results from the quality of amateur talent being drafted and signed. The extra money spent is partly attributable to slightly superior arbitration-eligible players, but mostly due to American League teams paying extra for talent on the free agent market. Regardless, it simply does not explain the difference which is at the level of non-market talent, players with less than six years of service time.
This logically needs to the next question, which is how the American League is accumulating all of this young talent. It must either be drafting better players and signing better Latin American free agents.
The following table lists how much of the WARP3 in the No Turnover Standings comes from both sources and indicates both sources are the cause:
The American League is acquiring young talent early. This leads right into the next question, which is why is the American League getting more talent? Is its clubs drafting more intelligently or are they just investing more money in the draft? It appears that the spending difference is the primary cause. Consider the following table summarizing the spending from 2006-09 on signing bonuses for the first 10 rounds of those four drafts. This is all per team totals for the four-year period.
Clearly the National League is drafting and signing more players, largely because the American League is losing draft picks to free agent compensation and also because the NL has two more team than the AL. However, the American League is spending more per pick and more overall as a result. Breaking this down by the first round versus the subsequent nine rounds, we see this trend even clearer:
The first-round spending is even more interesting considering that the American League teams were picking on average 4.2 spots later (14.0 vs. 18.2 average slot). The American Leaguers are spending even more on the draft, and that is clearly a large reason why the AL is better than the National League. Although the money spent on major-league free agents fails to explain the league difference, the money spent on draftees explains it.
I am hardly the first to highlight how much going over the MLB-recommended “slot” values for draft bonuses can pay off in producing talent. However, few others have pointed out the reason why this is happening. Please read the linked article for more detail, but the basic point that I made in that piece is that teams are all aware that spending a little extra for the hard-to-sign players is worth it in isolation. However, spending the extra money also makes it that much harder for teams to win.
Division rivals can each make more money if they avoid signing these players. Choosing how much to spend on draft picks is basically a prisoner’s dilemma occurring within a division. They both would earn more in the medium-run if they spend beyond the recommended slot bonuses, but that is only holding their opponents' spending constant. However, teams in a given division often make more in the long run if they each hold their draft spending levels down. Their strategy basically consists of adhering to the recommended slot bonuses, or “cooperating,” as long as their division rivals “cooperate” as well, but “defecting” if their division rivals “defect.” This strategy would not work if there were not drafts in the future where teams could “punish” defectors who paid over slot by paying over slot themselves.
It also will not work in all cases. Sometimes, the benefit from defecting is so large and the cost from your division rivals defecting is so small that it is not worthwhile. In the Yankees’ case, the cost of missing the playoffs is so large that allowing their division rivals to sneak in front of them in the standings is too dangerous. Thus, the Yankees spend a lot on the draft, going over slot in the latter part of the round to make up for their poor draft position. Without the ability to deter the Yankees from spending, the Red Sox and even the cash-strapped Rays find it worthwhile to pony up for draft bonuses as well, and frequently spend more on the draft than richer teams. With so many dominant teams in the AL East and the wild card playoff berth frequently a longshot for teams in the AL Central and the AL West, teams in those divisions frequently spend a lot of money on the draft as well. Consider the following table breaking the spending down by division in both the first round and the following nine rounds.
The AL East spends nearly $1 million more per first-round pick, despite picking on average around the 21st slot in the first round. As a result, the AL Central spends way more than the NL teams, too. The AL West teams still only have three other teams to compete with for a playoff spot, so they are better able to achieve cooperation than the AL Central it seems, but this draft spending in the AL East and AL Central is the source of the discrepancy.
Now, I certainly do not trust the Forbes’ estimates of 2009 operating income due to the amount of information that the magazine cannot gain access, but it is the only game in town at estimating earnings, so I figured I would see what its figures looked like in each league. For what it’s worth, they show that the National League teams have an average operating income of about $19.9 million, while the American League teams have an average operating income of about $14.5 million. If this difference is accurate, it appears that the cooperation by National League teams could be doing them the service of making them more money even if they are creating worse teams. It is hardly affecting the National League’s ability to win once it has reached the World Series as NL teams have won four in the last 10 years.
These numbers actually paint a much clearer picture than one might expect. Usually the numbers are not this crisp, but they all seem to point to the American League’s superiority coming from spending more money on young talent, while gaining no advantage from spending more money on free agents. This appears to be even stronger evidence of the repeated prisoner’s dilemma nature of the draft. There may not be any need for Major League Baseball to correct for this discrepancy, but it is certainly worth determining why it exists. These numbers appear to do exactly that.