Value of a Baseball Player’s Contract

DFN: This is the first in a series of articles regarding how to establish a value for a baseball players contract.

Ahead in the Count
Revising Player Contract Valuation, Part 1
by Matt Swartz
The first of a three-part series.
http://www.baseballprospectus.com/article.php?articleid=9955

Rumors pertaining to Johnny Damon’s eventual contract, not just as far as potential suitors go, but also what they might offer are increasing in frequency. If one were to buy into the hype, Damon could get anywhere from a one-year deal worth $4 million to one paying $33 million over three years. To come up with reasonable price estimates of his services, analysts are looking at recent deals doled out to comparables like Bobby Abreu and Mike Cameron, and it certainly seems like whoever brings Damon aboard will pay a similar price, a tad shy of the $10 million mark. Of course, when Matt Holliday was still on the free-agent market, there were no other comparable players getting deals. Holliday provided a WARP3 of 20.7 over the last three years compared to Damon’s 11.4. Considering age and basic regression factors, it stands to reason that Holliday is about twice as good as Damon, but does that mean he should be getting twice as much in salary? Is he worth more than twice as much? Evaluating the monetary value of free agents presents a tricky proposition, but an important one worthy of discussion nevertheless.

One of my upcoming projects at Baseball Prospectus is the development of a new version of MORP, or Market Value Over Replacement Player. Nate Silver developed MORP here for Baseball Prospectus in 2005 as a means of gauging the monetary value added by players and based the metric on the formula for WARP, which has since changed. Nate also developed the stat in a different market, when very few teams had sabermetricians in their front offices and Billy Beane could roam free. Times change, and with the changing market, MORP needs a makeover.

MORP’s purpose is not to estimate what the average team would get in value from a given player. It also does not attempt to answer what would happen if everybody in the league were a free agent at once. The latter situation would represent an entirely different labor market and it would be futile to speculate about what players would be paid in this case. MORP should only attempt to estimate what the market value would be for a given amount of production, holding everything else constant.

It is also important to acknowledge that players have different values to different teams. Matt Holliday made a lot more sense for the Cardinals than the Orioles. As teams bid on free agents in an auction format, the market value of a player becomes his value to the highest bidder, or really, the second-highest bidder. However, the difference between Holliday’s value to the Cardinals, Yankees or Red Sox might be very small compared to the difference between his value to the Cardinals and Pirates. Nate showed us that the marginal value of a win is much higher to teams who are on the cusp of making the playoffs because of the extra revenue the postseason generates. Therefore, a player’s monetary value to a team will be based on how much he would add to a squad in a situation of being projected to win, for example, 87 games but miss the playoffs, because those teams will get the most bang for their buck from the signed players.


Doug

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