I have been getting many requests to explain my player valuation system. I have added the following to the FAQ page.
How do you estimate the value of baseball players?
The method I use is complex and involves many steps. What follows is a brief explanation. I provide a detailed explanation in my book. Since its publication I have made a few minor modifications that I will detail in an upcoming book, but the basic structure is similar.
I estimate the impact of winning (via run-differential) on revenues (using Forbes’s The Business of Baseball report, various years). Then, I estimate the impact of player performance on run production (hitters) and run prevention (pitchers). These estimates are adjusted for home-park influences. I also add an adjustment for defense. In some cases I assume the fielder is average for his position, in other cases I use the Plus/Minus system to adjust for defensive quality. I then convert the run-contribution estimates to dollars using the estimates of the impact of winning on revenues. Because the impact of winning on revenue is non-linear, the reported values assume that the player is added to a .500 team. Players added to teams with above (below) average records generate more (less) revenue. The estimates are also gross (not net) marginal revenue product estimates, and therefore do not account for costs such as coaching, medical care, etc.
For projecting players into the future, I assume that league revenues grow at an annual rate of ten percent, which is consistent with the history of league salary growth. I also make an adjustment for aging.