Free Agency, Long-Term Contracts and Compensation in Major League Baseball: Estimates from Panel Data

Lawrence Kahn

The Review of Economics and Statistics, 1993, vol. 75, issue 1, 157-64

Abstract: Using longitudinal data for major league baseball players, this paper estimates the effects of eligibility for free agency or arbitration on compensation and contract duration. Becaus e eligibility is based on experience and better players are kept longe r, a fixed effects approach is used. Arbitration and free agency eligibility both raised annual compensation; however, only free agen cy raised contract duration. The free agency findings are consistent wi th Nash bargaining; however, additionally considering the arbitration results suggests the "winner's curse": duration rises only when a team might lose a player. The auction market is thus avoided. Copyright 1993 by MIT Press.

Date: 1993
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