Multi-period contracts as risk management in professional sports

The chapter examines issues related to contract-length in sport. It focuses on the observed phenomena in baseball where players on long-term contracts also receive a salary premium – a result that is counter to the standard hypothesis that workers on long-term contracts transfer their performance risk to clubs, and hence should be willing to accept a salary penalty for such transference. It discusses a possible reason for this empirical finding – high-skilled free agents are difficult to replace, and teams may be willing to enter long-term contracts to protect against future increases in the market price for these players’ services. The chapter’s empirical results find that both player performance and free agent-eligibility (as opposed to players that are only arbitration-eligible) independently increase the probability of a player receiving a long term contract.