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Marginal value, contract extensions, and Ozzie Albies

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MLB’s compensation structure encourages players to sign deals that undervalue their potential future earnings

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Consumers Feel The Pinch With Christmas Around The Corner Photo by Matt Cardy/Getty Images

Over the weekend I ran a couple of polls on Twitter, asking folks about choices they would make under a couple of different scenarios.

First:

Then:

Now, before you rush down to the comments to critique my methodology and challenge my sample group, I agree, this is unscientific and overly simplistic.

However, it shows a key factor in understanding people’s decision-making that I think oftentimes gets overlooked — the marginal utility a person will get from the potential results of their choice.

What is marginal utility? Wikipedia says it is “the change in the [the satisfaction or benefit derived by consuming a product] from an increase in the consumption of [a] good or service.” In simplistic terms, if I’m hungry, one cheeseburger has a high utility. A second cheeseburger has a lower utility. A tenth cheeseburger has essentially no utility, unless I can find a secondary market in cheeseburgers to sell them on, or if I’m really into eating three-day-old cheeseburgers out of my refrigerator.

Someone replied to the first of these polls and said that everyone taking the $1 million or the 50/50 chance of $3 million was choosing incorrectly. And that person is not incorrect, from the standpoint of maximizing your expected overall gain. Over a large sample size, taking the 25% chance at $10 million will give you an estimated $2.5 million per opportunity, compared to $1.5 million per opportunity for the 50% chance at $3 million, and the $1 million received in the guaranteed payoff.

But when you have an n=1, maximizing your expected payout has to be balanced against marginal utility. A person dying of thirst is going to take a liter of water over a 50/50 chance of 10 liters of water. A person with limited financial resources is going to place more value on an amount of money that will make them comfortable and remove, if not all their financial stresses, many of them, than on even a good chance of receiving what will likely be a much greater amount, but also includes the risk of getting nothing.

So, what does this have to do with baseball?

With revenues in baseball continuing to grow, and restrictions being put in place that limit the ability of teams to spend in the draft and in the international market, one would expect to see teams spending more money on actual major league players. This, I suspect, is what the union anticipated in agreeing to limits on draft and amateur spending — and to be fair to the union, it has generally been what has happened throughout the history of MLB. Given the opportunity to spend on major leaguers, teams have spent on major leaguers at a level that has benefited established players.

What we are seeing recently, however, is teams more and more looking to sign players to extensions very early in their careers — and the way player compensation in baseball is structured, it gives teams an enormous amount of leverage in getting players to concede to deals that significantly undervalue their future earning potential.

Look at the life of a player — he’s signed at 16 out of Latin America, or at 18-21 as a draft pick. Some players get sizable bonuses to sign, but many don’t. A player spends several years toiling in the minors making a sub-poverty-level-wages while under team control and not on the 40 man roster, and even once they are placed on the 40 man roster, they are making, while in the minor leaguers, middle class wages.

Then once a player makes the major leagues, they are going to make the minimum salary, or slightly more than minimum, for three years. Minimum salary in MLB is a healthy amount — $555,000 in 2019. A player can live comfortably on that, even after paying income taxes (both federal and, in the various locations he may play games, both home and road, city and state taxes), and after his agent gets his 5% cut. But it isn’t the sort of life-changing money that players can achieve once they’ve been in the league for a few years.

And for a player who has gotten a small bonus that is already gone, has spent time in the minors making peanuts, and who is facing a few years of getting a comfortable salary but with no guarantees beyond that, a team dangling the possibility of being able to be set for life is incredibly tempting, even for a player who knows logically that he is potentially leaving millions on the table.

Let’s look at Ronald Acuna and Ozzie Albies, two young stars for the Atlanta Braves who recently signed deals that were widely panned as well below market. Acuna received a $100,000 bonus in 2014. Of that amount, probably at least a third went to the buscone, the trainer/agent who worked with Acuna and got him his deal. Albies signed for $350,000 that same year. Each spent several years in the minors, making essentially no money. Albies came up late in 2017, Acuna early in 2018. Each was facing the likelihood of making minimum salary for the Braves for another 2-3 years.

Acuna, at the age of 21, having established himself as one of the top players in baseball last year, was offered a guaranteed $100 million from the Braves — in exchange, the Braves would have him under team control through 2028, when he will turn 31. The 22 year old Albies, meanwhile, coming off a 3.8 bWAR All Star season, took a guaranteed $35 million, keeping him under team control through 2027, when he will be 30.

Jeff Passan had a number of tweets on this subject, threaded here and worth reading, and notes that the Braves “bought itself hundreds of millions of dollars in surplus value.” He notes they got relatively small bonuses, and that teams can “take advantage” of players in buying out their future years “when they have leverage.” Ken Rosenthal also wrote about this dynamic with Acuna in April:

Many on the players’ side believe some teams circumvent the player and his agent and communicate directly with parents and other family members, particularly in the cases of Latin American players from humble backgrounds. The extent to which family pressure might have influenced Acuña is not known. But the effect of such pressure in some instances cannot be discounted – particularly when a team dangles a $100 million guarantee.

I don’t find early extensions for players inherently objectionable. I agree that there’s a risk premium, and the marginal utility of each dollar is such that a player can reasonably decide that they’d rather guarantee themselves $X now than play things out and potentially get much more than that down the road.

But there’s a certain point where the discount a team is insisting on for a deal to be done is unconscionable, where the leverage they have and the structure of MLB’s compensation structure work together to make a team’s behavior predatory. And I’m fearful that’s where we may be.

I understand the flip side of this argument. None of us will ever see $35 million, much less get it guaranteed for playing a game. Albies and Acuna are set for life, their families are set for life, and even if they suffer a career-ending injury, they are fine.

And from a risk-analysis standpoint, teams have more leverage than the players because they are ultimately making a number of deals. They are paying lots of players. If some of these long-term extensions don’t work, they are in a much better position to absorb the risk because, in the long run, they are paying out much less than the expected value they anticipate receiving — their expected return is still significantly in the black.

Which is why one of the most important things I think the MLBPA will need to do going forward is focus on increasing compensation to players early in their careers. Double the minimum salary. Make a player eligible for arbitration after one year, or after, say, 300 days of service time. Allow a system like there is in the NFL and the NBA, where a player can be offered a tender, and be a restricted free agent. Put more money in player’s pockets early in their career, rather than tilting the compensation structure so heavily for veterans.

Will it eliminate early extensions? Of course not. Some players are always going to want the security, just like some are always are going to bet on themselves. But if a player is making $1 million per year for a year or two, and then has the ability to make more in arbitration, or has the ability to be a restricted free agent and seek bids from other teams, it will make signing for 10 cents on the dollar early in their careers a less attractive option, and make sure the early extensions that do get signed are more equitable.