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A Theoretical and Empirical Comparison of Free Agent and Arbitration‐Eligible Salaries Negotiated in Major League Baseball

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  • Phillip A. Miller

Abstract

This paper presents a theoretical and empirical comparison of determination of negotiated salaries in baseball's free agent market to that in its final‐offer arbitration (FOA) system. The theoretical bargaining model of each system is based on Nash (1950). It is argued that Farber's (1980) model of FOA is not fully applicable in explaining baseball's FOA process. The free agent market and the arbitration system each determine negotiated salaries that are dependent on the different disagreement outcomes of the negotiators in the respective systems. It is thus concluded theoretically that the two systems will determine salaries differently. The theoretical analysis also suggests that there may be selection bias present when one empirically analyzes only negotiated settlements. Using a straightforward regression model that controls for productivity, playing experience, and the potential selection bias, the empirical analysis substantiates the theory's results. A method is then developed to estimate the effect that free agent salaries have on salaries for arbitration‐eligible players. It is found that there is a significant positive relationship between them, but the systems do not determine equal salaries for comparable players.

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  • Phillip A. Miller, 2000. "A Theoretical and Empirical Comparison of Free Agent and Arbitration‐Eligible Salaries Negotiated in Major League Baseball," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 87-104, July.
    • Handle: RePEc:wly:soecon:v:67:y:2000:i:1:p:87-104
    DOI: 10.1002/j.2325-8012.2000.tb00322.x
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    References listed on IDEAS

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    1. Paul L. Burgess & Daniel R. Marburger, 1993. "Do Negotiated and Arbitrated Salaries Differ under Final-Offer Arbitration?," ILR Review, Cornell University, ILR School, vol. 46(3), pages 548-559, April.
    2. Vincent P. Crawford, 1982. "Compulsory Arbitration, Arbitral Risk and Negotiated Settlements: A Case Study in Bargaining under Imperfect Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 69-82.
    3. Gibbons, Robert, 1988. "Learning in Equilibrium Models of Arbitration," American Economic Review, American Economic Association, vol. 78(5), pages 896-912, December.
    4. Myerson, Roger B, 1984. "Two-Person Bargaining Problems with Incomplete Information," Econometrica, Econometric Society, vol. 52(2), pages 461-487, March.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    6. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    7. David J. Faurot & Stephen McAllister, 1992. "Salary Arbitration and Pre-Arbitration Negotiation in Major League Baseball," ILR Review, Cornell University, ILR School, vol. 45(4), pages 697-710, July.
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    Cited by:

    1. Roberto Pedace & Curtis M. Hall, 2012. "Home Safe: No-Trade Clauses and Player Salaries in Major League Baseball," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(3), pages 627-644, July.
    2. J. Richard Hill & Nicholas A. Jolly, 2014. "Negotiated Settlement Under Mlb Final-Offer Salary Arbitration System," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 533-543, April.
    3. Turner, Chad & Hakes, Jahn Karl, 2007. "The Collective Bargaining Effects of NBA Player Productivity Dynamics," MPRA Paper 5058, University Library of Munich, Germany.

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