Comments on: Wisely Spending on CC

By: JC

JC — Sat, 13 Dec 2008 12:50:01 +0000

The annual allocation of the $161 million has not been released—or, at least, I haven’t seen it. I expect that the contract escalates in value with time, and that he will be getting annual paychecks closer to $30 million than $23 million at the opt out time.

By: Randy Hill

Randy Hill — Sat, 13 Dec 2008 04:27:01 +0000

Using revenue growth makes the opt out clause even more expensive. He’s probably worth $30M a year over the last 4 years of the contract if your figures are correct, but he’ll be able opt out and find someone else to pay that. He’ll be worth less than $23M a year for the first three years of the contract. So if he’s healthy and doesn’t decline, the Yankee’s will slightly overpay for three years of his services, then be forced to substantially increase his pay or lose him.

If he gets hurt, or declines, it’s likely he’ll be worth substantially less than $23M a year in the last 4 years of the contract, but the Yankees will be stuck overpaying him again. In what unlikely scenario is this a good contract?

By: JC

JC — Thu, 11 Dec 2008 12:11:35 +0000

CC was worth about $19 million last season—he pitched well and pitched a lot. His value is expected to rise, even as he ages, as a result of revenue growth of approximately 10% a year.

By: Randy Hill

Randy Hill — Thu, 11 Dec 2008 04:33:04 +0000

CC was only worth $16m a year the last three years according to your previous figures, but now somehow he’s going to be worth almost 50% more per year as he declines. And with a 3 year opt out clause that guarantees the Yankees will overpay him substantially if he disappoints or is injured, and that CC will accrue any extra value if he excels.

By: Rick

Rick — Wed, 10 Dec 2008 21:26:41 +0000

But, if he stays healthy won’t he make more money if he does opt out after three years? I would think that wins will cost teams more then than they do now. I think the Yankees were not too bright to include the opt out.

By: JC

JC — Wed, 10 Dec 2008 21:09:20 +0000

The opt out probably cost CC some money. If the market is in better shape he can leave, but if he pulls a Mike Hampton they can’t get rid of him. I think the contract is pretty darn close to what his value would be at his best—can he pitch much better than he has?—so the Yankees probably didn’t mind throwing it in there.

By: Cliff

Cliff — Wed, 10 Dec 2008 20:34:09 +0000

How does the opt out affect the calculation? It seems that the surplus value over 23 million in years 4 through 7 is unlikely to be realized. If the player continues to perform and salaries continue to inflate, then he “opts out.” If the player performs poorly or is hurt, then the team keeps the obligation.

I honestly think that risk in years 4 through 7 exceeds any net value in years 1-3. It seems like a foolish strategy for a team to accept. Particularly if you are the industry leader in pay and nobody else is likely to match you. Cashman should have said, “If you want us to guarantee our payment to you even if you aren’t good, then you have to work to the end of the contract for us, even if the market goes up.” And if the Angels, Giants, whoever, wanted to play this game, let them.

By: leviinalaska

leviinalaska — Wed, 10 Dec 2008 19:37:46 +0000

Hey, thanks for your reply!

By: JC

JC — Wed, 10 Dec 2008 17:57:00 +0000

Good questions leviinalaska.

1) This is just a rough estimate, so it is possible that I am understating his value.

2) The estimates are gross marginal revenue product (MRP) estimates that do not subtract out non-salary costs of employing the players. Coaching, medical care, travel expenses, etc. are real costs. I don’t subtract this out because I don’t have a good way of knowing exactly what those costs are. Insurance payments ought to be included that can be used to hedge against risk. We would prefer net MRP estimates, but that is very hard to estimate.

3) Risk is partially included in this measure because I base the estimates on past injury history and aging. CC has been very healthy and he is young.

4) Also, the estimates assume a player is added to a .500 team. Adding a player to a winning team adds more revenue. He is probably worth more than my estimate.

By: leviinalaska

leviinalaska — Wed, 10 Dec 2008 17:48:45 +0000

JC,

A question about economic theory:

If the Yankees are paying “fair value” for CC over a six year contract, aren’t they overpaying? Doesn’t the team deserve some kind of “discount” for being willing to assume the risk of a guaranteed contract for so long? How would economics take into account the value of the risk that the Yankees are taking?