Josh Byrnes, the GM of the Arizona Diamondbacks, just signed Chad Tracy to a 4-year $13.25 million deal (guaranteed) with an option for a fifth year at an additional $6 million ($7 million minus the $1 million buyout that is guaranteed). Mark Shapiro, of the Cleveland Indians, did something similar with several of his young players earlier this season, and it’s something his predecessor, John Hart, did as well.
As a general rule, individuals tend to be risk averse while firms are risk neutral. Baseball teams can diversify away risk—by signing many players—while players have their financial nest-egg in one basket. For a reserved player who has the potential to be a star, he’s likely to forgo some of his expected future earnings for a guarantee of stability. This represents a huge opportunity for teams to free up financial resources. As David Pinto puts it:
Tracy is a solid offensive player who is now locked up through his peak years. Not too long that he can cost the team a lot of money with a career ending injury, and they don’t need to worry about arbitration.
The league minimum may seem like a lot of money, but it’s not over the course of a lifetime. I expect, as must the D-backs, that Tracy is going to be worth more than $3.5 million/year for the next four years—I estimate that Tracy was worth $8.15 million in 2005—and Tracy is happy to trade some of that potential income for stability.
I also wonder how players behave after signing deals like this. You might think that a player who gets some guaranteed money over the next few years would shirk, but I think the exact opposite might happen. There is still the potential for a bigger payday down the road, and I’m sure Tracy wants to win. Maybe he’ll be more likely to do some little things that might injure his chances of getting a long run payoff—like dive for balls or get into collisions, or do strenuous weight-training. He might also be willing to share knowledge with younger teammates who could compete for his job. And let’s not forget generating good will with players.