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April 24, 2014

Explaining Spending

Deriving Teams' Optimal Spending Strategies

by Lewie Pollis

A couple weeks ago, I made the argument that the cost of a win on the free agent market for a given season does not represent a generally homogeneous league-wide conception of what a win is worth. Rather, the more logical explanation is that it reflects the largest amount any team would be willing to pay for the Nth win available after the first N – 1 wins were hypothetically distributed in accordance with who valued each of them most highly. (Economic theory can sound weird when you apply it to real life.)

As an economics student and baseball fan I find this idea to be fascinating, but I admit that the origin of the price of a win doesn’t have many practical uses in concrete baseball analysis. However, if I am correct, this theory does have two important implications for understanding how MLB teams (should) operate: that the price of a win and the value of a win are two different things, and that this uncoupling means a marginal win can be worth significantly different amounts to different teams.

With these assumptions in our minds, it is possible to construct a reasonably simple model for a team’s optimal player-signing and front office employee-hiring strategy in the league labor market.

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