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Moral hazard in Major League Baseball : a contract's effect on future performance

by Hedges, Ryan Jarvis

Abstract

With the growing capital invested in Major League Baseball and the subsequent inflation of salaries, much scrutiny is given to a franchise’s allocation of its budget. Long-term contracts are a tool used to manage risk, but also create the potential for players to shirk. Therefore, the question of how a contract affects performance has become increasingly pertinent. Past work has attempted to determine the effects through simple regression analysis and resulted in many conflicting conclusions. My work is rooted in a large data set of contract figures, performance statistics, and injury history. I analyze contract length, salary size, changes in salary, contract incentives, among other contract figures. An extensive inclusion of variables to determine expected performance is utilized to ensure utmost accuracy. Through various approaches, I examine how all aspects of a contract may impact future performance, including the effect on injuries. My findings show that specifically hitters engage in shirking, while there is no strong evidence for pitchers. However, pitchers are shown to display volatile year to year performance levels and higher paid pitchers exhibit weaker performance. Hitters are also found to be injured significantly less during their contract year. My findings have provided recommendations for a how a low-budget franchise can allocate its spending to increase its chances for success.

Note

Colorado College Honor Code upheld.

Includes bibliographical references.

Administrative Notes

Colorado College Honor Code upheld.

Copyright
Copyright restrictions apply.
Publisher
Colorado College
PID
coccc:7919
Digital Origin
born digital
Extent
67 pages : illustrations (some color)
Thesis
Senior Thesis -- Colorado College
Thesis Advisor
Kapuria-Foreman, Vibha
Department/Program
Economics and Business
Degree Name
bachelor
Degree Type
Bachelor of Arts
Degree Grantor
Colorado College
Date Issued
2013