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Are Mlb Signing Bonuses Too High? an Analysis of Player Production and Investments in Draft Picks

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Are Mlb Signing Bonuses Too High? an Analysis of Player Production and Investments in Draft Picks ARE MLB SIGNING BONUSES TOO HIGH? AN ANALYSIS OF PLAYER PRODUCTION AND INVESTMENTS IN DRAFT PICKS A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Timmy Hall May 2012 ARE MLB SIGNING BONUSES TOO HIGH? AN ANALYSIS OF PLAYER PRODUCTION AND INVESTMENS IN DRAFT PICKS Timmy Hall May 2012 Mathematical Economics Abstract Major League Baseball (MLB) teams are often criticized for overspending on amateur draft picks. Sports business professionals and the casual baseball fan argue that awarding unproven amateur baseball players millions dollar signing bonuses is not a sound investment. However, previous studies in sports economics have found that teams are willing to sign better players to higher salaries or signing bonuses in order to increase their production or team wins. Similar to the labor market, baseball teams will attempt to create a product (team wins) by employing signing inputs (players who provide skills and services). This paper attempts to quantify or place monetary values on a single total value baseball statistic, Wins Above Replacement (WAR), to determine the Market Value of a baseball player’s production. WAR represents the additional amount of wins a player contributes to his team over a season. This paper then tests the overall performance and investment of baseball draftees from the 1996 through the 2000 Rule IV Draft. Results of this study reveal that professional baseball teams on average receive a very positive return on their investment in amateur drafts picks. KEYWORDS: (Major League Baseball, Rule IV Draft, Wins Above Replacement) ACKNOWLEDGEMENTS I would like to recognize and thank Dr. Kristina Lybecker for her aid and advisement throughout this senior thesis project. Without her help, I would never have been able to complete this project. Her guidance and support has made both this project and my academic experience at Colorado College a fun and enjoyable four years. I would also like to thanks my parents, Tim and Renee, for their unwavering support and patience with me. I cannot stress enough how much I have appreciated your help and feedback throughout this project and my academic career. TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENTS 1 INTRODUCTION 1 Obstacle to Economic Analysis…………………………………………………. 2 Pioneering Economic Analysis…………………………………………………. 3 Conventional Wisdom and the Collective Bargaining Agreement……………... 4 Literature Review……………………………………………………………….. 6 Measurements of a Player’s Value…………………………………………. 6 The Value or Importance of a Win to a Team……………………………… 9 Classification of Major League Baseball Players………………………….. 12 Introduction Summary…………………………………………………………... 20 2 THEORY 21 Market Value of Win Shares……………………………………………………. 21 Market Value of WAR………………………………………………………….. 23 Adjustment Factor Model…………………………………………………... 26 Linear Regression Model…………………………………………………... 27 Market Value of WAR Model……………………………………………… 30 Conclusion………………………………………………………………………. 30 3 APPLICATION OF THE DATA 31 Data Set and Sources……………………………………………………………. 31 Description of the Data Set……………………………………………………... 38 Conclusion………………………………………………………………………. 40 4 RESULTS AND ANALYSIS 41 Discussion of Variables…………………………………………………………. 43 Draft Investment Analysis………………………………………………………. 46 Draft Investment Results………………………………………………………... 50 Conclusion………………………………………………………………………. 52 5 CONCLUSION 53 Future Research…………………………………………………………………. 54 Implications……………………………………………………………………... 56 SOURCES CONSULTED…………………………………………………………... 57 LIST OF TABLES 3.1 Summary Statistics of Regression Variables………………………………... 39 3.2 Summary Statistics of Market Value Variables……………………………... 40 4.1 Table of Results for Linear Regression Model………………………….. 42 4.2 Calculations for the Market Value of WAR………………………………… 44 4.3 Market Value of WAR………………………………………………………. 45 4.4 Success of Top 100 Draft Picks and Average Salary………………………... 46 4.5 Positive Draft Pick Evaluation: Kris Benson………………………………... 47 4.6 Negative Draft Pick Evaluation: Jim Parque………………………………… 48 4.7 First Overall Pick Evaluation: Pat Burell……………………………………. 49 4.8 1996-2000 Draft Analysis…………………………………………………… 50 LIST OF FIGURES 3.1 Free Agent Players and Salary………………………………………………... 32 3.2 Salary Versus WAR…………………………………………………………... 34 3.3 Free Agent Players and WAR………………………………………………… 35 CHAPTER I INTRODUCTION Major League Baseball (MLB) teams are notorious for spending large amounts of money on their amateur draft picks. The general perception among the sport’s business professionals and every-day fans is that it is money not well spent. Moreover, it is popular notion that small and middle-market franchises suffer from this practice. We will first examine the challenges of measuring the performance of baseball draftees and the respective return on the bet or investment made on them. Additionally, we will assess whether large market teams benefit at the expense of smaller markets. At the center of our analysis will be a study previously undertaken by a current major league player that demonstrates professional baseball teams on average receive a very positive return on their investment in their amateur draft picks. Finally, a new measure of a baseball player’s productivity will be substituted in the above referenced model to improve its predictive capability. A good example of the largess in baseball occurred recently in the 2011 June Amateur Draft where the Pittsburgh Pirates awarded the first overall pick, UCLA pitcher Gerrit Cole, an $8,000,000 signing bonus.1 This is an incredibly large investment in a player who has yet to compete in a Major League game. Through economic analysis we 1 "Baseball-Reference.com - Major League Baseball Statistics and History " [cited 2011]. Available from http://www.baseball-reference.com/. 1 2 will attempt to prove that this was not naïve wishful fancy but actually a rational investment decision. Obstacles to Economic Analysis Even though the apparent financial excesses of the draft has been a controversial topic for baseball General Managers (GM’s), players and fans for years, economists have not rigorously analyzed it due to the difficulty in measuring the professional athletes productivity. One such challenge is it usually takes years for a prospect to develop into a legitimate major leaguer. It is a long time to fruition because after a player is drafted and signs his professional contract he is sent to the Minor Leagues for years of skill development. It is normally many years after he was selected in the draft before a special player makes it to the Major Leagues. In fact, only “5 to 7 percent of all prospects who sign professional contracts make it to the Major Leagues.”2 This long gestation period makes it more difficult to track players progress and thus to study the ultimate performance or outcome of recent amateur drafts. Another challenge for baseball scientists has been the historical lack of a single value statistic for analyzing a player’s production. Until recently economists had no metric to analyze the market value of a player. To solve this problem, “Win Shares” contribution was developed circa 2002 to measure the value of a position players and pitchers in one single statistic. It combines classic sport specific statistics such as batting average, on base percentage, fielding assists, and earned run average to evaluate a player’s contribution to the team regardless of position. 2 Abrams, R.I. The money pitch: Baseball free agency and salary arbitration. Temple Univ Pr, 2000: 41. 3 Another reason why this topic has not been heavily researched previously is that non-baseball people do not easily understand the draft and first-year contract system. The historical arrangement has an indentured servitude element to it and is difficult to model. Once a player is drafted and signed with the team he is bound to that team for a maximum of twelve years and receives a minimal annual salary.3 The current Minor League salary system awards first year players at its lowest level $850 per month, regardless of their pick number in the draft. The salary of a first year player at the highest level in the Minor Leagues, Triple-A, is only $2,150 per month.4 Pioneering Economic Analysis In a 2006 study analyzing the success of financial investments in drafts, current Major League Pitcher and Princeton alum, Ross Ohlendorf, calculated the market value of a Win Share, the single unit measurement of a player’s contribution reference above. To determine the market value of a Win Share, he compiled all players eligible for free agency from the 1989 through the 2004 season along with their salaries and Win Shares contribution for each season. After quantifying a player’s contribution or value to their team using a linear regression of salary versus Win Shares, he analyzed the benefits of each amateur player drafted from 1989 to 1993. Ohlendorf concluded the average rate of return of all the draft picks was 60.30% and the average net gain from each pick was 3 12 years is the maximum amount of service time an organization can maintain the rights to a player as a result of drafting him. The player is able to play six Minor League Seasons and six Major League seasons but organizations typically lose or concede the rights more quickly. 4 "Pay Structure of Minor League Baseball Players." in National Sports and Entertainment Law Society [database online]. [cited 11/21/2010]. Available from http://nationalsportsandentertainment.wordpress.com/2010/03/17/pay-structure-of-minor-league-
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