The not-so-free agent: Non-performance factors that contribute to free agent compensation premiums

In this study, the authors examine Major League Baseball free agency to identify whether certain factors beyond a player’s on-field performance contribute to contract premiums. These premiums are considered to be the difference between the compensation a player receives in free agency and the marginal revenue product (MRPt-1) in their contract year. Using 345 free agent transactions over a four-year period (2012–2015), the authors examine the relationships between potential free agent contract premiums and the attributes of a player’s previous team, as well as how contract premiums may be influenced by the level of interest from other teams and certain facets of the acquiring teams. Results suggest that free agents tend to receive compensation premiums when they played for a successful team during their contract year. Playing for a large-market team during their contract year also influenced contract premiums. In addition, free agents tended to realize compensations premiums when multiple teams were bidding for their services, the acquiring teams were in playoff contention the prior year, and the acquiring teams possessed relatively more financial resources. Findings shed additional light on how factors peripheral to a player’s on-field performance may influence the free agency market. Recommendations include that effective control mechanisms are necessary to ensure free agent compensation is commensurate with the value of the player.