Why Don’t More GMs Do This?

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.

4 Responses “Why Don’t More GMs Do This?”

  1. jack says:

    The Eric Hinske contract didn’t work out so well…

  2. JC says:

    Some won’t work out but some will. If you sign several players to long-run deals, when players value stability, you’re going to come out ahead.

  3. studes says:

    Actually, I think a lot of clubs are doing this. Tampa Bay is a great example.

    Of course, what he’s worth and what he’s likely to get are two different things. He’ll be subject to the arbitration process for the duration of this contract.

    Still, I agree that this is a great deal for the Dbacks. In fact, I think the agent blew it. Tracy would have had a good chance to make more in his fifth or sixth year, let alone his free agent year. I wonder if his agent has heard of inflataion.

    To me, the key for many of these deals is doing what the Dbacks did, getting an option for at least the first year of free agency.

  4. PK says:

    Empirical evidence seems to show that players at a minimum do not shirk after signing long-term contracts. See Maxcy, et. al., The Effectiveness of Incentive Mechanisms in Major League Baseball, 3 J. of Sports Econ. 246 (2002).