Comments on: The Economics of the Longoria Deal http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/ Economic Thinking about Baseball Sun, 09 Jan 2011 17:16:18 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Sam http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102645 Sam Wed, 23 Apr 2008 16:44:48 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102645 Firms are also risk averse. In fact, to a large extent, firms are more risk averse than individuals (see investment decisions and gambling). This, obviously, is only on average. However, what I think the author meant to say (and touched on briefly) is that teams are able to reduce their risk through diversification, which means that they have a different risk/reward scale than individuals. E.g. You are the Rays, and you have 10 good young players. Each one has a 50% chance of being worth $5 million over the next 6 years, and a 50% chance of being worth $25 million. That means the expected value to the team of each player is $15 million, which is the same as the expected salary. A player may be willing to take a guaranteed $12 million, reducing their expected payment by $3 million, becuase 50% of the time this will pay them $7 million. To the team, this $12 million per player is an increase in expected value of $30 million ($3 million savings * 10 players). However, the chances of them realizing a $70 million loss (the same proportion to the individuals gain) is only .098%. Firms are also risk averse. In fact, to a large extent, firms are more risk averse than individuals (see investment decisions and gambling). This, obviously, is only on average. However, what I think the author meant to say (and touched on briefly) is that teams are able to reduce their risk through diversification, which means that they have a different risk/reward scale than individuals.

E.g. You are the Rays, and you have 10 good young players. Each one has a 50% chance of being worth $5 million over the next 6 years, and a 50% chance of being worth $25 million. That means the expected value to the team of each player is $15 million, which is the same as the expected salary. A player may be willing to take a guaranteed $12 million, reducing their expected payment by $3 million, becuase 50% of the time this will pay them $7 million. To the team, this $12 million per player is an increase in expected value of $30 million ($3 million savings * 10 players). However, the chances of them realizing a $70 million loss (the same proportion to the individuals gain) is only .098%.

]]> By: jfalk http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102642 jfalk Wed, 23 Apr 2008 13:29:54 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102642 I agree that they are uncommon, but that's at least partially because long-term deals like this are uncommon. As to whether or not shirking is easy to spot, I frankly doubt it. Slow returns from injuries, lackadaisaical play, a period where you just can't seem to find the plate... hard to determine against the background, no? Sheffield, Dick Allen, Garry Templeton come to mind. I agree that there have been few holdouts, but there have been lots of players who asked to be traded, and it seems to me the difficulty of monitoring shirking is why they get accommodated. Longoria will, I assume as part of this contract, not be allowed to waive his CBA rights to approve trades if he has enough seniority... something else he can use as leverage as well.... Overall, I grant there is an arbitrage opportunity to strike a bargain around players' risk aversion, but there are monitoring costs which go strongly in the other direction. You may be right that the balance favors these sorts of deals... I'm less sure. I agree that they are uncommon, but that’s at least partially because long-term deals like this are uncommon. As to whether or not shirking is easy to spot, I frankly doubt it. Slow returns from injuries, lackadaisaical play, a period where you just can’t seem to find the plate… hard to determine against the background, no? Sheffield, Dick Allen, Garry Templeton come to mind. I agree that there have been few holdouts, but there have been lots of players who asked to be traded, and it seems to me the difficulty of monitoring shirking is why they get accommodated. Longoria will, I assume as part of this contract, not be allowed to waive his CBA rights to approve trades if he has enough seniority… something else he can use as leverage as well….

Overall, I grant there is an arbitrage opportunity to strike a bargain around players’ risk aversion, but there are monitoring costs which go strongly in the other direction. You may be right that the balance favors these sorts of deals… I’m less sure.

]]> By: kosmo http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102637 kosmo Tue, 22 Apr 2008 22:07:15 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102637 JC, I believe that Sheffield tanked when he was with Milwaukee in order to force a trade. I don't know if he ever actually admitted it, but I seem to remember that a lot of folks thought he did. Nearly two decades later, I still hold it against him (and I'm not even a Brewers fan) You are correct that tanking and salary holdouts are uncommon in baseball. JC,

I believe that Sheffield tanked when he was with Milwaukee in order to force a trade. I don’t know if he ever actually admitted it, but I seem to remember that a lot of folks thought he did. Nearly two decades later, I still hold it against him (and I’m not even a Brewers fan)

You are correct that tanking and salary holdouts are uncommon in baseball.

]]> By: Dan http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102634 Dan Tue, 22 Apr 2008 20:56:03 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102634 Will there ever be a market for players to insure their risk? That is, if a pool of young players were to group together (or a market acting for the players) and agree to each contribute x% of their future revenues in case of the collapse of any one of them, it seems to me there would be a way the players could then get the best of both worlds. They can guarentee they will be rich, even if they have a terrible injury, but still can hold out for the big bucks. Just a thought. Given the dollars involved, would any agent consider offering this kind of insurance to a pool of talented young players? Will there ever be a market for players to insure their risk? That is, if a pool of young players were to group together (or a market acting for the players) and agree to each contribute x% of their future revenues in case of the collapse of any one of them, it seems to me there would be a way the players could then get the best of both worlds. They can guarentee they will be rich, even if they have a terrible injury, but still can hold out for the big bucks.

Just a thought. Given the dollars involved, would any agent consider offering this kind of insurance to a pool of talented young players?

]]> By: JC http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102625 JC Tue, 22 Apr 2008 16:01:03 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102625 <a href="http://www.sabernomics.com/sabernomics/index.php/2007/03/breaking-down-the-mccann-deal/" rel="nofollow">My take</a> on the McCann deal is similar. Tanking to earn your release has a few problems. 1) It's easy to spot, and will probably allow the club to void the deal while placing the player on the restricted list. 2) If a player does such a good job at tanking that the team decides to release him, then no other team will be waiting to offer a big payday. 3) Who wants to sign a guy who will shut it down when he's not happy? Holdouts of major leaguers baseball players happen rarely. The last one I recall was Roger Clemens in 1987. There have probably been a few others since then that I do not recall. My take on the McCann deal is similar.

Tanking to earn your release has a few problems.
1) It’s easy to spot, and will probably allow the club to void the deal while placing the player on the restricted list.
2) If a player does such a good job at tanking that the team decides to release him, then no other team will be waiting to offer a big payday.
3) Who wants to sign a guy who will shut it down when he’s not happy?

Holdouts of major leaguers baseball players happen rarely. The last one I recall was Roger Clemens in 1987. There have probably been a few others since then that I do not recall.

]]> By: jfalk http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/comment-page-1/#comment-102624 jfalk Tue, 22 Apr 2008 14:33:27 +0000 http://www.sabernomics.com/sabernomics/index.php/2008/04/the-economics-of-the-longoria-deal/#comment-102624 Two questions: 1) How does this deal compare with the McCann deal? 2) More importantly, though, isn't there a huge moral hazard problem with this deal in that the player is given an implicit option to shirk and capture the upside. Suppose Longoria turns out to be a $30 million player. What's to stop him him from striking out every time up until the club lets him go or ponies up the difference? Aren't there examples of literally dozens of players who renegotiate salaries to capture the upside? I know I'd be willing to be categorized as someone with a "bad attitude" to earn a few million dollars more someplace else. Two questions: 1) How does this deal compare with the McCann deal? 2) More importantly, though, isn’t there a huge moral hazard problem with this deal in that the player is given an implicit option to shirk and capture the upside. Suppose Longoria turns out to be a $30 million player. What’s to stop him him from striking out every time up until the club lets him go or ponies up the difference? Aren’t there examples of literally dozens of players who renegotiate salaries to capture the upside? I know I’d be willing to be categorized as someone with a “bad attitude” to earn a few million dollars more someplace else.

]]>