Contract Length and Salaries Compensating Wage Differentials in Major League Baseball

Abstract

This study investigates the relationship between free agent salaries and contract length in Major League Baseball (MLB) to examine whether players trade-off returns to performance for additional job security. This study is the first to conduct a comprehensive, multiperiod study of salary determination for all MLB position players who were free agents and signed contracts between 1984-1994 and 2003-2006. The authors use the same technique and variables in all models so that comparisons across time are possible. The empirical results of this study indicate that free agent position players appear willing to trade monetary returns to performance for the security of a longer guaranteed contract. The results are not sensitive to the definition of salary used but are sensitive to the productivity measure employed. The results are least compelling for 1990-1994, a result that is different from the finding of Krautmann and Oppenheimer.