My first thought when I saw that Pat Gillick had locked up Chase Utley for the next seven years for $85 million was that it is a good deal. Sure enough, when I popped his performance into my long-run salary projector tool, he projects to be worth about $115 million, $30 million more than he will get over the life of the contract. Even after I acknowledge that the Phillies could be paying him a little less during his arbitration years, it is still a good deal. But then I had a thought. What about Marcus Giles?
Baseball-Reference has Giles as the third most similar player to Utley through age 27. And based on Giles’s 2006 performance, he’d be worth only $55 million over seven years. Yikes! That would make this a very bad deal. But one player comparison doesn’t render the deal a bad one. He also compares well to many players with very good careers.
As any economist will tell you, there is no such thing as a costless choice. The Utley deal is the type of risk that teams should make. Individuals tend to be risk averse, while firms are risk neutral. If a player suffers diminished capacity in his ability to play baseball, this will result it big financial loss that is difficult to guard against. While teams invest in many other assets that include many players and other business interests. Some will go bad, while others will succeed. Because of its diversified portfolio of assets, the damage that any one project is likely to be balanced by success in another. Players, however, will want to guard against their loss of ability, and ought to be willing to accept less than the expected value of their future performance. This represents a profit opportunity for teams.
In several years, this deal may not look so good: Utley may get injured or the economics of the game may change. But the potential for failure shouldn’t deter GMs from making similar moves. The future is not 100% predictable, so it’s unfair for blaming a GM for signing a deal like this if it goes bad.
Addendum: Some of you are curious about where “my long-run salary projector tool” comes from, and with good reason. I briefly introduced it in a post on Barry Zito’s worth, but I didn’t go into great detail. Basically, I take a recent marginal revenue product estimate of player performance (explained in detail in The Baseball Economist), assume a 10% annual rise in revenues and salaries (consistent with the historical rise in salaries), and make a minor adjustment for aging. It’s a rough model, but useful.