This article looks at the role an owner’s attitude toward risk plays in his salary bids for free agents in Major League Baseball. We show that risk-averse owners will pay a premium for consistency on the field. Our empirical results are consistent with the hypothesis that a free agent’s contract terms are negatively related to the degree of variability in his performance. To the extent that our results carry over to all players, this suggests a heretofore unrecognized factor affecting the market for talent in professional sports.
AndersonC.SallyD. (2013). The numbers game: Why everything you know about soccer is wrong. City of Westminster, England: Penguin Books.
2.
BaronD. (1970). Price uncertainty, utility, and industry equilibrium in pure competition. International Economic Review, 11, 463–480.
3.
BeladiH.LyonK. (1986). The effects of risk aversion when an input is random: A note. Quarterly Journal of Business and Economics, 25, 71–83.
4.
BodvarssonO.BrastowR. (1998). Do employers pay for consistent performance? Evidence from the NBA. Economic Inquiry, 36, 145–160.
5.
BollingerC.HotchkissJ. (2003). The upside potential of hiring risky workers: Evidence from the baseball industry. Journal of Labor Economics, 21, 23–44.
6.
BurgerJ.WaltersS. J. (2008). The existence and persistence of a winner’s curse: New evidence from the (Baseball) field. Southern Economic Journal, 75, 1.
7.
DaughetyA. (1982). Stochastic production and costs. Southern Economic Journal, 49, 106–119.
8.
DeutscherC.GurtlerO.PrinzJ.WeimarD. (2013). The payoff to consistency in performance. Presented at the 2012 Western Economic Association meetings, San Francisco, CA, July 2012.
9.
HolthausenD. (1979). Hedging and the competitive firm under price uncertainty. American Economic Review, 69, 989–9895.
10.
KahnL., (1993). Free agency, long term contracts, and compensation in major league baseball: Estimates from panel data. Review of Economics and Statistics, 75, 157–164.
11.
KrautmannA. C. (1999). What’s wrong with scully-estimates of a player’s marginal revenue product?Economic Inquiry, 37, 369–381.
12.
KrautmannA. C. (2013). What’s right with scully estimates of a player’s marginal revenue product: Reply. Journal of Sports Economics, 14, 97–105.
13.
KrautmannA. C.OppenheimerM. (2002). Contract length and the return to performance in major league baseball. Journal of Sports Economics, 3, 6–17.
14.
KrautmannA. C.CieckaJ. E. (2009). The post-season value of an elite player to a contending team. Journal of Sports Economics, 10, 168–179.
15.
LazearE. (1998). Hiring risky workers. In OhashiI.TachibanakiT. (Eds.), Internal labour markets, incentives, and employment. Basingstoke, England: Palgrave Macmillan.
16.
LelandH. (1972). Theory of the firm facing uncertain demand. American Economic Review, 62, 278–291.
17.
LelandH. (1974). Production theory and the stock market. Bell Journal of Economics and Management Science, 5, 125–144.
18.
MarcusA.ModestD. (1984). Futures markets and production decisions. Journal of Political Economy, 92, 409–426.
19.
MaxcyJ. (2004). Motivating long-term employment contracts: Risk management in major league baseball. Managerial and Decision Economics, 25, 109–120.
20.
NielsenN. (1975). The price and output decisions of the firm under uncertainty. Swedish Journal of Economics, 77, 459–469.
21.
NanceD.SmithC.SmithsonC. (1993). On the determinants of corporate hedging. Journal of Finance, 48, 267–284.
22.
PedaceR.HallC. (2012). Home safe: No-trade clauses and player salaries in major league baseball. Industrial Relations: A Journal of Economy and Society, 51, 627–644.
23.
RabinM. (2000). Risk aversion and expected-utility theory: A calibration theorem. Econometrica, 68, 1281–1292.
24.
SandmoA. (1971). On the theory of the competitive firm under price uncertainty. American Economic Review, 61, 65–73.
25.
SchmidT.AmpenbergerM.KasererC.AchleitnerA.-K. (2008). Family firms, agency costs and risk aversion—Empirical evidence from diversification and hedging decision(Working paper series). Center for Entrepreneurial and Financial Studies, Technische Universitat Munchen, Munich, Germany.
26.
SmithC.StulzR. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20, 391–405.
27.
SolowJ. S.KrautmannA. C. (2011). A nash bargaining model of the salaries of elite free agents. Journal of Sports Economics, 12, 309–316.
