Archive for Hot Stove Economics

In Defense of Expanding the Playoffs

This morning, Craig Calcaterra pointed me to an article by Jeff Passan, who argues against expanding MLB’s playoffs to include two more teams.

Passan seems most upset that the Commissioner, owners, and players are united in support of the expansion due to their financial interests. More playoffs mean more dollars, which will be spread amongst them. I have trouble finding fault with this motivation. After all, I’m an economist, I’ve been repeating Adam Smith’s famous words to students for years.

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Of course, Selig and friends want more money. The way they get it is by making fans happy by giving fans the baseball they want. If more playoffs result in more happiness, then revenue will go up. I think this is a good thing. Now, some fans may be made less happy, but overall we’re happier with more baseball. It’s not baseball versus the dollar.

Passan is also concerned that expanding the playoffs will dilute the sanctity of the regular season. (I’ve also heard this argument used to support the BCS format in college football, and I can’t help but point out that Passan co-wrote the book Death to the BCS.) For example, it could affect the playoff races in new ways.

Imagine the following: The Tampa Bay Rays and New York Yankees enter the season’s last week with 95 wins apiece. The Boston Red Sox, with 90 wins, hold a comfortable lead for the second wild-card spot, and Minnesota and Texas, each with 90 wins, have wrapped up their divisions. Suddenly, the only teams playing for something in that last week are the two best in the league. They will do everything they can to avoid a wild-card spot despite having clinched playoff spots already. Empty their rotations. Play full bore. A five-game series in the first round is already a crapshoot. A three-game series would be a complete toss-up.

Let’s say the Yankees win the AL East. The Rays exhausted their pitching staff while a team they were five games better than during the regular season – the six-month-long, 162-game regular season – was able to set up its rotation and rest its players.

And that’s fair how, exactly?

But, the situation is not just one-sided. What if all the division titles have been decided? Then potential Wild Card teams have little to play for. I know that the last two weeks of Braves baseball this year would have been quite dull after falling out of contention for the NL East. Picking my daughter up from school to drive her straight to Turner Field to watch a de facto exhibition game wouldn’t have been as exciting joining the cheers of a playoff race that we got to see. I’m actually more intrigued by the fact that already clinching teams will be playing real baseball down the stretch, as they should.

I also like having more playoffs. It’s more baseball for me to watch, and it provides additional opportunities for more teams to get a taste of the playoffs. For all the concern over the financial determinism of the big-market teams holding an unfair advantage, lowering the bar for entrance into the playoffs allows small-market teams an opportunity to feel the excitement of playoff baseball, and compete on a level where they can rise up over high-payroll Goliaths. The regular season tells us whom the best teams are, the playoffs are about something else, something else that is good. Here is an excerpt on the playoffs from my new book.

While it is common to judge teams by their post-season success, the performance over five-game and two seven-game series tells us less about the quality of a team than a 162-game season. The laws of probability allow plenty of room for the best not to rise to the top in the current playoff format. For example, assume there is a series between two unevenly-talented teams, and the superior team has a 55-percent probability of winning any game against the inferior opponent. In a best-of-seven contest the inferior team would still be expected to emerge as the champion 40 percent of the time. It would take 23 games for the inferior team to have less than a 5-percent chance of winning more games than the superior team.1 Statisticians Jim Albert and Jay Bennett estimate that the best team in the league has a 75-percent chance of making the playoffs, but only a 21-percent chance of wining the World Series.

The short-series playoff format is an institution that fuels the uncertainty of competition, which breeds interest and excitement in the sport. High-payroll clubs like the Yankees do have an advantage over those with low budgets, but the disparity is one that is frequently overcome with the help good management and chance. You have to be good enough to get to the playoffs, but once you get there, the playoff format gives every team a decent chance of winning. Even though the Yankees can build the best team in baseball, it does not guarantee a World Series victory. Despite wining an average of 96.5 games per season from 2000 to 2010, the team captured only two World Series.

As a side note, the post-season performance column of Table 6.1 reveals another fact about the recent competitiveness in the league. 23 different teams made the playoffs during these seasons—that’s three-fourths of the league! That so many teams have played beyond the regular season over such a short period of time indicates that the league is meeting the competitive balance standard laid out by Commissioner Bud Selig’s Blue Ribbon Panel: “every well-run club has a regularly recurring reasonable hope of reaching postseason play.” (p. 125, Hot Stove Economics)

And though I favor expanding the playoffs, I don’t think we should expand them forever. There are diminishing returns to adding teams. If we let everyone in, the regular season will lose it’s luster. Going from eight to ten teams doesn’t bother me. Some playoff races may disappear, but others will rise up. Only good teams will make the playoffs, but teams at a financial disadvantage have more opportunities to experience playoff baseball. In the end, it’s a subjective argument. If you want to go back to NL and AL champions determined solely by records, I have no problem with that. But, I disagree with you, and I think there is a good argument to be made for expanding the playoffs.

The Rockies Curious Moves: de la Rosa and Tulowitzki

Yesterday, the Colorado Rockies made two odd moves: one that I’m pretty sure is a bad deal, and one that is bold.

First, the Rockies agreed to a three-year, $32 million deal with Jorge de la Rosa. De la Rosa has pitched well for the Rockies, but he’s averaged under 150 innings per year for the last three years. If he pitches consistently as well as he has over 220 innings per season, then this might be a good deal—and maybe the Rockies think he can—however, I think that’s unlikely—his career high is 185 innings pitched (2009). I estimate his worth to be about $21 million over the next three seasons.

Second, the Rockies are supposedly nearing a deal with Troy Tulowitzki on a six-year extension for $119 million. While I’m normally a fan of locking up guys long-term while they are young, Tulowitzki’s new contract doesn’t kick in until 2015, and runs through 2020. A lot can happen between now and then, and the Rockies own his rights in the meantime, so it’s quite a gamble for the Rockies. Over the term of his contract, I estimate Tulowitzki to be worth $190 million, which makes $119 million sound like a cyber-Monday discount. But, given that so much can happen between now and then, I think it’s a large risk for the Rockies to take. Maybe they think that they can directly buy insurance, or diversify away much of the risk in a way that makes it a good gamble. Frankly, I’d love to know the motivation behind this deal, because it is so unique. It seems so crazy, I feel like they must be on to something.

Valuing Juan Uribe

Several sources are reporting that the Dodgers and Juan Uribe have agreed to a three-year, $21 million contract. Over this time, I have him valued at just under $23 million, so this deal seems about right.

Uribe is often criticized for being overweight and underwalked. But, on the upside, he plays good defense and hits with power. Such players are valuable.

Q&A at Wages of Wins

Here’s an interview about Hot Stove Economics with Dave Berri at Wages of Wins Journal. Here is a tease.

2. There are many sabermetric books, or books looking at statistics in baseball. How is your book different from the other books in this area?

Well, I use some sabermetrics in my book for valuing players. Bill James, John Thorn and Pete Palmer, and Voros McCracken all made important contributions to helping us understand what things players do to help teams win. I don’t dwell on sabermetric questions. My main goal is to understand the business relationship between play on the field and financial success. Sabermetricians have used some financial models to connect player performance and worth, but these simple approaches are too limited to proxy the impact of performance on revenue. What’s missing from sabermetric value assessments is economics. I approach the problem using common tools of labor economics, which has been missing.

Valuing Aubrey Huff

Many sources are reporting that the Giants have signed Aubrey Huff to a two-year, $22 million deal. The deal also supposedly includes a team option for a third year (no details yet).

I estimate Huff to be worth about $23 million over the next two seasons, so this deal seems about right.

Valuing Victor Martinez

Rumor has it that Victor Martinez has agreed to a four-year, $50 million contract with the Detroit Tigers. Supposedly, Martinez has turned down other offers of $48 million.

Over this contract term I estimate Martinez to be worth approximately $47 million. The estimate is a little less, but in the ballpark of the reported contract.

Albert Pujols: The First $40-Million Man

It looks like the St. Louis Cardinals and Albert Pujols are looking to sign an extension that will keep him in St. Louis for life. Jon Heyman writes that Albert Pujols is looking for a contract similar to Alex Rodriguez‘s ten-year, $275 million deal that he signed with the Yankees in 2008. Heyman predicts that Pujols will be getting an eight-year, $240 million deal. I think these predictions are way off, on the low side.

When his new contract kicks in, four years will have passed since A-Rod signed his deal with the Yankees. When league revenues have been growing at a rate of 8-9 percent per year, salaries escalate quickly as the revenue growth rate compounds. In 2019, $27.5 million is going to seem like peanuts. I agree with Heyman that ten years is probably a bit much, but for an eight-year deal, I estimate Pujols is looking at a $350 million contract ($43.75 million per year). While that’s a big number to swallow, Pujols’s continued excellent performance and MLB’s growing revenue are going to push that number easily over the $30 per year million mark. And, I won’t be surprised if he ultimately ends up with a contract that averages over $40 million per year.

Breaking Down Uggla for Infante and Dunn

So, the Braves didn’t wait long to get the power bat they were looking for, acquiring Marlins slugger Dan Uggla for Omar Infante and Mike Dunn. So, how does the deal break out?

I estimate Uggla’s play to be worth $11 million in 2011, while collecting a salary of $9-$10 million in his final year of arbitration. I estimate Infante to be worth $5.5 million with his salary contractually set at $2.5 million. Dunn is expected to be worth $800,000 with an estimated salary of just over the league minimum of $400,000. The values reveal that the Braves become a better team, but they will be paying for it. Infante will be in the last year of his contract, while Dunn still has five years of service time left.

The Marlins move was preceded by Uggla turning down a four-year, $48 million contract that I thought was a fair offer. The Braves may think that they can use the next year to hammer out a reasonable extension, like they did with Tim Hudson after acquiring him from the A’s, but Uggla does not seem to be willing to take a discount—he’s reportedly asking for five years and $71 million, too steep. Maybe, now that Uggla is reunited with manager Fredi Gonzalez he might be more amenable to a deal, but that’s wishful thinking.

The Marlins get some good value out of a player whom they were going to lose after this season anyway. Infante will immediately fill Uggla’s hole in the lineup, and while I don’t expect him to repeat his 2010, he’ll do a fine job on a reasonable contract. Dunn’s performance projection has wide variance; he could become a regular reliever or never make a big-league roster again. He’s a junk bond that the Marlins are willing to gamble on. When the Marlins open their new stadium in 2012, they’ll have salary room to add a player or two and be on the fringe of contention as they seem to be every year.

Baseball Prospectus Interview about Hot Stove Economics

David Laurila interviews me about Hot Stove Economics at Baseball Prospectus.

Here’s an excerpt.

DL: Do the luxury tax and revenue sharing work?

JCB: My thought is that there are some very real negative incentives created by it, which cause bad teams, particularly bad losing teams, to continue to lose. There is a disincentive to win, because winning would mean you’re not going to get the revenue sharing that you were once getting.

One of the things that I find in my estimating-revenue function, which includes revenues from revenue sharing, is that at very low levels for bad teams there is actually a revenue bump. I call it the loss trap. It shows that as you lose games, you can increase your revenue. That’s consistent with the economic incentives created by the welfare system—you realize that if you better yourself with work, you’re going to get less of the welfare transfer, so you have little incentive to work.

I don’t think that many teams are actually trying to exploit this revenue bump, but what it does demonstrate is that if you’re very bad, and the high returns to winning don’t kick in until teams are earning in the mid-80s of wins, in revenue, you have teams that are winning 70 games saying, “I don’t want to fall off into the abyss and become a really horrible team, but there’s really not a huge incentive to get better if I can sit here and get fat off of revenue sharing.” The documents that were released this summer seemed to indicate that is what some teams were doing.

Part II will be posted on Wednesday is now posted. Thanks to David for conducting the interview

On $-per-Win Estimates of Baseball Players’ Worth

Frequently, I receive a comment or e-mail that brings up the dollar-value estimates at Fangraphs.com. Fangraphs is a fine site with lots of interesting numbers, but I don’t think the dollar-value estimates listed on the site (or any simple wins-to-dollars conversion) properly value players. Here’s why.

1) The derived estimates are based on the assumption that there is a constant linear relationship between wins and dollars. This assumption is incorrect: there are clear increasing returns to winning. This is the revenue function I estimated for my book, converted to wins instead of runs.
Returns to Winning

2) By dividing the total value of free-agent contracts (Y) by total “wins” added by the signed free agents (X), this method assumes the y-intercept (b) is 0, which biases the estimates. Y = mX + b, when you assume b is zero when it’s not, bad things happen to slope m. The graph below from the popular econometrics textbook Understanding Econometrics: A Practical Guide by A.H. Studenmund demonstrates why this assumption biases the estimates.

Suppressing Y-Intercept

Due to the thinness of the free-agent market and the potential for market mistakes, I prefer a fundamental-value approach to valuing players as opposed to a market-valuation approach. However, if I want to use the free-agent market to value talent, I prefer Anthony Krautmann’s “free-market returns” approach, which can be implemented in ways to avoid the problems mentioned above.

In Chapter 4 of my book, I explain why I prefer the Gerald Scully inspired approach to the free market returns approach. This is not to say that market prices are not useful for valuing free agents. In my book explain where free market returns helped me shape my estimates. Also, here is a working paper in which I discuss the pros and cons of the Scully and Krautmann methods.