This study focuses on panel data of 256 MLB free agent hitters under the 2006-2011 Collective Bargaining Agreement (CBA) to demonstrate that hitters, on average, increase their offensive production, measured by OPS100, during the last year of their contract and subsequently underperform the first year of the newly signed long term contract. The contract year phenomenon arises from the incentive to land a lucrative guaranteed contract for players not intending to retire. Signing a long term guaranteed contract creates an incentive to shirk (underperform) the first year of the new contract because performance and pay become unlinked and the need to boost performance for another contract is years away. A player’s intention to retire negates the incentive associated with a new contract, which mitigates the contract year boost and leads to greater shirking.
Modeling OPS100 over the contract cycle requires focusing on within player behavior using seasonal statistics, intention to retire, and incorporating unobservable player traits, such as innate ability, work ethic, family background, etc. that may differ across players. Fixed effects, as opposed to OLS or pooled OLS, estimation addresses potentially biased results from omitting unobserved traits. Controlling for games played and team play-off contention, players at the end of a multiyear contract show a 6% boost in OPS100, but it declines by 1% for each percentage point increase in the probability of retiring. Players on one year contracts, however, boost their OPS100 by 13% without retirement effect. Signing a five year contract leads to a 4% drop in OPS100 during the first year of the newly signed contract and each additional year on a new contract creates another 2.5% decline in OPS100. While there is no evidence of shirking for two to four year contracts given no change in “retiring”, statistically significant shirking occurs for two to four year contracts if retiring intention increases by 8 and 3 percentage points, respectively.
These findings suggest that general managers negotiating free agent contracts may wish to sign less than five year contracts to mitigate shirking behavior and estimate the likelihood of a player retiring since it impacts future performance.
O'Neill, Heather M., "Boom & Bust: The Perils of Guaranteed Long Term Contracts. Evidence From OPS100 Performance Over the Contract Cycle" (2015). Business and Economics Faculty Publications. 11.
Behavioral Economics Commons, Benefits and Compensation Commons, Collective Bargaining Commons, Labor Economics Commons, Performance Management Commons, Sports Management Commons, Sports Studies Commons