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June 29, 2004

You Get What You Pay For

Are Major League Teams Overpaying for Power?

by Ben Murphy and Jared Weiss

Part I: Background, Premise, and Setup

Inherent in the desire to develop better baseball statistics--and as a result, improve baseball analysis--is the belief that this information is not only available but also not being used by the men and women who run baseball. As Moneyball and the resulting reaction has showed, some General Managers seem to be using the same methods for performance evaluation that were used 20 or 40 years ago.

It therefore stands to reason that GMs are paying players not for actual performance, but rather for perceived performance as viewed through the rusty glasses of decades-old beliefs about the statistics of the game. For this study we wanted to find out if General Managers were, in fact, paying players along the lines of their objective "value" (as defined by VORP), or if there was something else in play.

One of the biggest challenges for the study was finding a proper data set. It seems clear that the best set of players to use was free agents. These players have their salaries determined on what is (arguably, for sure) a decent approximation for a free market, or at least the closest MLB is going to see. As economic theory tells us, these players will then be signed for something approximating their true value.

To provide a brief example, let's pretend slugging first baseman Joe Schmoe is a free agent. If he is perceived to be worth $10 million, then if the Knights and Bears are in the market for a first baseman and have the money, it is clear that both will be willing to spend up to $10 million. Anything over that and Mr. Schmoe will not be worth the money, so his suitors will pass. Thus, Joe gets his $10 million, and more or less, whichever team offered it first gets the first baseman.

This model relies on three key assumptions. First, there are at least two teams interested in each player. This assumption is not much of a problem, since it seems unlikely that a particular player will only fill one team's needs. Second, the teams interested in a player are willing to spend as much as he is worth. As stingy as some teams might be, it again seems unlikely there will only be one team willing to spend as much as a player is perceived to be worth. Finally, we assume that a player has a single specified value. This assumption is a little shakier since a team with two solid first basemen is unlikely to be willing to spend much on Mr. Schmoe; but it does seem plausible that the few teams in the market for a slugging first baseman would place similar values on a particular player.