The Effectiveness of Long-Term Contract Incentive Mechanisms in Major League Baseball
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2020
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Haverford College. Department of Economics
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Award
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eng
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Open Access
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Abstract
In Major League Baseball, long-term contracts which guarantee players' salaries, regardless of the players' level of play, are commonplace. This gives rise to a potential principal-agent problem, where the player, upon signing a long-term contract, is incentivized to behave opportunistically and reduce effort. This would cause players to play below expectations, or "shirk". Major League Baseball teams have responded to this incentive by offering award bonus clauses in some long-term contracts, which are aimed to incentivize a high level of play and/or increased playing time. The focus of this paper is to establish the level of shirking that occurs in long-term contracts, and then to examine how effective these award bonus clauses are at reducing shirking. This paper also estimates and controls for the likelihood that each player will retire after a given contract. Using contract, award bonus, and injury data from Baseball Prospectus Legacy and Spotrac, as well as projections for each player's expected performance from The Baseball Guru and actual performance from the Lahman Baseball Database, I do not find significant evidence that players' shirking behavior changes throughout a contract. I find that increased time on the disabled list (where players go when injured) increases shirking, and that the presence of cash award bonuses decreases the time that a player spends on the disabled list. This suggests that the presence of cash bonuses may decrease shirking indirectly, but the effects of cash bonuses on shirking are still insignificant when controls for disabled list stints are taken out of the regression of shirking on cash bonuses. Overall, I am unable to reject the hypothesis that players' shirking behavior in a contract changes when given award bonuses, more guaranteed years in a contract, or a higher likelihood of retirement. This may suggest that award bonuses are ineffective at combating any incentive to shirk.