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November 18, 2013

Baseball Therapy

Why Do Teams Overpay for Free Agents?

by Russell A. Carleton


It’s free agent season, which means it’s time to complain about whom your favorite team is signing. Or not signing. Or reportedly thinking about signing. Or reportedly thought about signing and whom you would have complained about if they had signed him, but now that you know that they are not signing him, you’re angry that they didn’t have the courage to do it. In the eyes of their fans, all 30 teams will do so much to damage their potential for a World Series championship in the next three months. And they’re mostly right. There will be 29 teams that will fail to win the World Series next year. Teams are really bad at this.

This winter, someone will do something big like signing Robinson Cano or Clayton Kershaw to a contract that will end when my oldest daughter is a tween and that has more money in it than the entire annual GDP of the nation of Kiribati. And someone will do something silly like giving a four-year contract to a 30-something-year-old player that will pay him as if he were assured to be a four-win player for those years, even though he’s showing sure signs of decline and hasn’t been worth four wins in three years. It’s easy to look at every signing and declare it an overpay, especially when the only guideline for a “proper” amount of payment is the handy “5 or 6 million per win” rule. If only things were that simple.

I worry that the rule of $5 million has gotten a little too ingrained in analysis of free agent contracts. It’s not a horrible shortcut, but like any shortcut, it’s bypassing consideration of a lot of other important factors. So, as we enter the heart of free agent season, let’s look at the rule of $5 million and why it seems that teams are always “overpaying” for free agents.

Reason no. 1: We’re Looking at the Problem All Wrong
We often lose sight of the fact that the point of the exercise is not to have the best ratio of dollars spent to wins generated. A team filled with players making a million each and who all put up half a win above replacement value will have a ratio of $2 million per win (What value!), and can point that fact out to their fans as they lose 110 games. Teams are looking to augment their roster in free agency. The goal might be to maintain respectability and patch a hole during a rebuild so that a hotshot prospect can have more developmental time, but usually, it’s the same thing we do every offseason, Pinky. Try to make the playoffs.

In general, analysts do seem to have some awareness of this. There’s some manner of absolution given to teams that “overpay” if they are on the bubble of playoff contention and the signing will pull them a lot closer to that goal. Making the playoffs comes with a fantastic revenue boost, and going from the 89th win to the 90th is more likely to result in a playoff appearance than going from 65 to 66.

But let’s also consider that teams with a lot of potential talent due to arrive in two years might sign a free agent to a four-year deal with an eye toward treading water in years one and two, and then having a complementary piece already in place for years three and four (at this year’s prices!) when the young talent comes to the big club and matures. This seems to have been the basic idea behind Jayson Werth’s contract with the Nationals after the 2010 season.

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Premium Article Minor League Update: A... (11/18)
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Baseball Therapy: The ... (11/25)
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