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November 16, 2010

Prospectus Q&A

J.C. Bradbury, Part I

by David Laurila

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J.C. Bradbury is the author of The Baseball Economist and the newly-released Hot Stove Economics: Understanding Baseball’s Second Season. An associate professor at Kennesaw State University, Bradbury has a Ph.D. in economics from George Mason University.

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David Laurila: From your perspective as a baseball economist, what does this year’s hot-stove season look like?

J.C. Bradbury: I think it looks pretty standard in most respects, although looking at the market—the guys who are out there—the pitching looks rather thin compared to some years. You basically have Cliff Lee and then a huge drop-off.

Not having multiple big stars makes for a two-fold effect. One, if you want to hire a pitcher in the free-agent market, it’s probably the easiest way because you don’t have to go through trades. But it also means that a lot of teams are probably happier with what they have, so they’re not searching. That affects the demand side of the market. The demand side is actually weaker, and the supply side stronger, in the sense that Cliff Lee is the only guy out there. You might be looking at Lee, but there aren’t a lot of teams out there that will be looking for starting pitchers.

DL:
Because Lee is the only marquee pitcher on the market, will he be overpaid relative to his value?

JCB:
No, I don’t think that the size of the market will affect that at all. Cliff Lee is going to be valued because he is going to help some team win. And he’s going to be more valuable to a winning team. You have a team like the Yankees—a very good team that fell just short of going to the World Series—which is going to be able to offer him more than other teams. That’s because they’re a winning team as opposed to just an average team, along with the fact that they may have a bigger budget. Of course, they also face the luxury tax, which could hinder them, although it doesn‘t seem to have hindered them much.

DL:
We’ll get to the luxury tax in a moment, but can you elaborate on why Lee has more value to the Yankees than he does for “an average team”?

JCB:
One thing I’ve looked at is how much teams’ run prevention and run production matter to generating revenue to proxy wins. Basically, the more teams win the more valuable each of those wins become, and it’s pretty obvious why that production function is not linear.

Let’s say you have a team that has won 81 or 82 games. If they win a few more games, maybe they’ll be close to making the playoffs and their fans will be moderately excited, which is a good thing. But say you go from winning 89 games to 93 or 94 games. If you do that, you really put your team over the top and the fans are going to be even more excited. On top of that, your team is likely to get a share of post-season revenue.

DL:
How much money are we talking about?

JCB:
How much that revenue is going to be depends on how far you go, because it’s an expected-value calculation. Sixty percent of gate share goes to the players, there is money that goes over to the commissioner, as well as paying umpires and things like that, so we’re talking about roughly 35 percent of playoff revenues going to teams. They’re splitting it, so if the series goes seven games, then for three of those games you get to keep all of the revenue. So there’s a probabilistic element to it, and the general estimate is about a million dollars per game.

DL:
Do the luxury tax and revenue sharing work?

JCB:
My thought is that there are some very real negative incentives created by it, which cause bad teams, particularly bad losing teams, to continue to lose. There is a disincentive to win, because winning would mean you’re not going to get the revenue sharing that you were once getting.

One of the things that I find in my estimating-revenue function, which includes revenues from revenue sharing, is that at very low levels for bad teams there is actually a revenue bump. I call it the loss trap. It shows that as you lose games, you can increase your revenue. That’s consistent with the economic incentives created by the welfare system—you realize that if you better yourself with work, you’re going to get less of the welfare transfer, so you have little incentive to work.

I don’t think that many teams are actually trying to exploit this revenue bump, but what it does demonstrate is that if you’re very bad, and the high returns to winning don’t kick in until teams are earning in the mid-80s of wins, in revenue, you have teams that are winning 70 games saying, “I don’t want to fall off into the abyss and become a really horrible team, but there’s really not a huge incentive to get better if I can sit here and get fat off of revenue sharing.” The documents that were released this summer seemed to indicate that is what some teams were doing.

DL:
What about teams on the other end of the spectrum, like the Yankees and the Red Sox?

JCB:
They’re being harmed in the sense that some of the revenues that they’re taking in have to be shared with other people, but I don’t think that teams like the Yankees and Red Sox really mind the revenue sharing. They like to think that baseball is popular around the country and that it helps build interest. But my notion, and complaints, of revenue sharing is that while the big-market teams would certainly rather keep that money, there really isn’t a good mechanism to encourage teams to use it to promote competitive balance.

A team can say, “Oh good, now we have some money, so let’s throw it at the team,” but if it makes more sense to invest that money in the stock market—if there are higher returns there—then you’re not going to invest it in the team. There have been some safeguards supposedly put into the collective-bargaining agreement to encourage teams to spend some of that money on talent. For example, Florida signed Josh Johnson to a long-term contract after the union was threatening to file a grievance. But it’s really hard to enforce.

DL:
Derek Jeter is, at least technically, a free agent. What is his value to the Yankees relative to what it would be to other teams?

JCB:
Jeter might be the most interesting player to look at, perhaps even in my lifetime, in that respect. There are few players that a large number of kids go to the ballpark and say, “I’m going to see that guy,” and in this case they’re all Yankees fans. So Jeter and the Yankees are both in a quandary, because they both know that the other is more valuable when they’re together. What they have is a bilateral-monopoly bargaining position. Jeter knows that the Yankees are willing to pay him more and the Yankees know that he’ll work for less.

Pretty much no other team in the league is going to be able to offer a comparable salary. Jeter is also very wealthy and may just not want to be shown up. So there is really a chance to strut around, and the Yankees may try to lowball Jeter, and Jeter may try to get more money out of them, but in the end they’re more valuable together than they are apart.

DL:
In your book, you talked about how Bronson Arroyo took less money to sign with the Red Sox in 2006, only to be traded two months later.

JCB:
The interesting thing about Arroyo is that he signed a below-market deal to stay in Boston, and his agents were saying, “Do not do this.” Importantly, one of the things that happened is that he didn’t get a no-trade clause.

From my estimates, it looked like Arroyo was much more valuable than what his contract was going to pay him, and all of a sudden the Boston Red Sox said, “We have an asset that is worth way more than what we paid; we can trade him.” Basically, he became a tradable asset, so Arroyo’s decision not to get that no-trade may have gotten him more money—you usually get less when a no-trade is included—but it also caused him to leave Boston.

Arroyo’s case differs from Jeter’s though, because I think Jeter is going to end up signing an above-market deal because he has more value to the Yankees.

DL:
Adrian Gonzalez and Zack Greinke may be available in trades this winter. What is their relative value?

JCB:
Basically, their current teams own a lot of their value right now. I don’t know Greinke’s contract off the top of my head, but he is certainly "earning" well more than he is being paid by the Royals. The Royals don’t look like they’re ready to contend next year, so he’s going to be more valuable to other clubs.

The Royals have a right to pay Greinke this contract, so they can get more out of him from other teams and some of that excess value that he would otherwise get on the free-agent market can be captured by the Royals, who maybe can use that to buy more players and become better.

DL:
How does losing a player like Greinke impact a team’s fan base?

JCB:
I haven’t specifically looked at the individual impact of marquee players on teams, but I’m in the Jerry Seinfeld league of fans who are out there rooting for clothes. We want to win. If I’m a Royals fan, yeah, I’m sorry to see Greinke leave, but what they want in Kansas City is a team that wins.

One thing we know about sports is that winning generates fan interest; you’ve got to win. So Kansas City may say, “Look, we have a certain good asset here that is very valuable, and if we can cash in that chip we can start building a winning team. We can get more draft picks and other things that will help us sustain more long-term wins and succeed in the future.” So with a guy like Greinke, who has a salary that is lower than his relative worth, you might want to move him if your team isn’t going to be good, at least not in the relatively near future.

DL:
What about the Padres and Gonzalez?

JCB:
With a guy like Adrian Gonzalez, it’s a little different. The Padres have a tough decision to make, but they also a nice decision to make. You have a player who is valuable—on a pretty good team—so you kind of want to keep him and hope that you can make it to the postseason. The question is: Was San Diego’s performance last year kind of fluky; can they repeat?

If they don’t think that they will reach that high-return situation, they might at least be able to get some value out of him if they trade him, particularly to a contender, because you stand to lose him anyway. But at the same time, you’re going to knock yourself off of that portion of the revenue curve, where you’re earning higher revenues, because they’re probably at least a mid-80s-win team right now.

This is one of those interesting situations where it might be worth just holding onto him to see how your team is doing before you trade him. I’m normally of the opinion that you should go ahead and trade players, because you can get more for them, but if San Diego thinks “We have a shot” and keeps him on the team, then if after two or three months it becomes “We’re not going to compete,” there is still plenty of time to trade him. You’re probably going to get less than you would have before the season, but on the other hand there might be a team that hadn’t been expecting to compete and is willing to pony up, and they have some prospects you really covet. So what I think that San Diego is going to do is hold onto him, see how he does, and if the season doesn’t go well they’ll quickly dump him.

DL:
Suppose the Padres keep Gonzalez and make the postseason, but then lose him to free agency and fall back to being a 75-win team? Revenue-wise, was the short-term gain worth the long-term loss?

JCB:
To be honest, this is a situation where my average-revenue function actually might lose its usability. I’d need to know something much more specific about San Diego’s individual revenue function. That is something that they’re going to have to understand about their own market, in terms of their long-term prospects. “Is this going to invigorate our fan base in a way that it might not invigorate other markets?” and, “What is our financial standing?” This is one of those situations where generalizations aren’t as helpful, and you need team-specific information about payroll costs and revenues that are only held by the team itself, and isn’t public knowledge.

DL:
The Pirates have essentially torn everything down and started from scratch. Does that type of rebuilding strategy work from an economic standpoint?

JCB:
I don’t like to call out individual organizations, but the Pirates have obviously not had a lot of success. They traded away some of their players—for example Nate McLouth—to try to get some extra value, but they still seem to be struggling. A lot of what goes on with a team like the Pirates may be bad management, but then again a lot of it might be bad luck. You need to have a few things go right, or hope that a few things don’t go wrong, to succeed.

Cincinnati, for years and years, was grinding it out and they finally made it back to the postseason this year. So I don’t know of anything specific that Pittsburgh is doing incorrectly, but what they were doing before certainly wasn’t working and they need time to straighten it out. Like I said, some of it may not be the GM’s fault at all; some of it may be back luck.

As for how the revenue function works, there are really high returns to winning. If you’re not doing that well—if you’re just stumbling along—you’re not losing much by dumping your best players. You’re at the low end of the revenue curve anyway, and fans are coming out just to get the major-league experience. They know you’re going to lose anyway, so dumping a few of your top guys—like if Kansas City does that with Greinke—that’s a very smart move.

Let’s say you’re like Cincinnati and all of a sudden you’re very good. Then it makes sense to go out and pay some of these free agents, and get some of these marquee guys, because that’s when the returns for winning are highest. If you’re a team like the Pirates, you need to approach it in a different way.

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 To be continued on Wednesday. In part II, Bradbury talks about the economic value of managers, the free-agent value of Carl Crawford and Jayson Werth, the Tampa Bay situation, and more.

3 comments have been left for this article.

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