Newswise — With the annual winter baseball meetings under way, fans wonder whether the expensive long-term contracts their favorite team gives to big name free agents will give them the incentive to play hard.
A new study by University of Iowa researcher John Solow confirms that players who sign long-term contracts do tend to have a drop-off in performance in the first year of the new deal.
But Solow, an economics professor in the Tippie College of Business, said the drop-off is not as great as fans might think. And whatever disincentives the player might face early in the contract, performance increases as the player starts thinking about his next free agent deal, eventually peaking in the so-called walk year of the contract.
"Whatever incentive to shirk there might be is mostly offset by the fact that pretty soon, they'll be signing another contract and if they don't perform, it will be worse than the one they have now," Solow said.
The exception to this is the player nearing the end of his career and who is signing what will likely be his last long-term contract. In those instances, Solow's study suggests that player performance stays below expectations throughout the contract, likely because the player no longer has an incentive to play for the next deal.
Solow and his co-researcher, Anthony Krautmann of DePaul University, looked at the statistics of the 527 free agent hitters who signed contracts of two years or more between 1997 and 2007 (that represents only about 44 percent of all free agent contracts signed during that period, Solow said. The majority of free agent contracts -- about 56 percent -- are for one year.) Baseball contracts guarantee their salary for the player, and while some do include bonuses for reaching certain performance milestones, the player gets paid the value of the contract no matter how well or how badly he performs on the field.
They then established an expected performance level for each player using a formula that predicts the player's On-base Plus Slugging Percentage (OPS), taking into account other factors such as past performance, age and injury history. Using this to determine a measure of underperformance, they estimate that a player who has a high likelihood of signing another contract has an OPS about three points below where they would be expected to perform in the first year of a three year contract. That number is minimal, he said, pointing out that even in the case of the rarer five-year contract, underperformance only reaches a value of ten points of OPS lost in the first year.
But by the second year of a three-year contract, most players return to their expected level of performance. Ultimately, it reaches a positive value of eight points above expectation in the walk year as players pad their statistics in anticipation of free agency.
"Long-term fixed-salary contracts do provide an incentive to shirk," Solow said. "When we consider players who are not expected to sign a subsequent contract, these incentives lead to a large and statistically significant reduction in performance compared to expectations. The incentive to perform well in anticipation of signing the next contract is equally large and offsetting, however, so the players who expect to sign another contract largely play up to expectations."
Solow is quick to add that despite finding evidence of shirking, his research doesn't imply that major league baseball players take the field with the intention of failing.
"This isn't to suggest that a batter goes up to the plate thinking, I've got my $17 million contract, I'm just going to wave at three pitches," he said. "These are professional athletes, they're competitive people and they don't like to fail."
Instead, he said shirking more likely comes in the form of not preparing fully after signing a long-term contract -- do they arrive at spring training in good physical condition? Do they put in time lifting weights or analyzing video? Do they go out after games and party, or do they go back to their hotel for a good night's sleep?
"You have to be careful to say they're shirking because performance is very complex and many factors come into play," he said.
Solow's and Kaufmann's paper, "The Dynamics of Performance over the Duration of Major League Baseball Long-Term Contracts," was published earlier this year in the Journal of Sports Economics.
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