THE BOOK--Playing The Percentages In Baseball

If you can’t see the chart in full, click the main article link:

http://www.insidethebook.com/ee/index.php/site/article/the_fallacy_of_paying_too_much_for_out_years/

My only concerns are:

(1) A team might be less likely to let an ineffective player go if he’s still making $16.6 M vs. $4.5 M.

(2) It might be more effective for budgeting reasons, since paying $16.6 M for $4.5 M of production (given the same total salary as in previous years) might make it harder to field a competitive team in the out years.

Obviously neither of those is a certainty, and both are easy to get around assuming the team understands sunk costs and has the ability to budget effectively over the longterm. If I don’t have faith in my team to do that, then I’d be more worried about out-year problems. When the O’s signed Brian Roberts to a 4 year, $40 M extension I raised all of the above points - not a terrible deal in overall value (at the time), as long as they act intelligently in the future about it since it was very unlikley he’d be worth $10 in the 4th year.

It’s may be beside the point, but it seems to me that in the chart, Discount Rate ought to bear some resemblance to $perWAR, since both are measures of inflation (kind of).  In year 2, you have a discount rate of 5% but salaries rise 10%.  If I think $1 million is going to buy me 10% less next year, I’d use a discount rate about equal to 10%.

If I matched discount rate to $perWAR (which you can certainly do if you like), you’ll end up with a flat $ per WAR.

If I do that, the sum total of Flat$ and Salary$ will equal.  And that doesn’t sound right.

(2) It might be more effective for budgeting reasons, since paying $16.6 M for $4.5 M of production (given the same total salary as in previous years) might make it harder to field a competitive team in the out years.

If the goal is to make the playoffs, it’s much better to pay $12 million for $18 million in production, since it means you are getting a discount to spend on other players that will increase your chances of making the playoffs.

If you are always paying at value, you have less budget flexibility (unless you’re the Yankees).

Variability may make you suck worse in the low end, but it also allows for more extreme results on the high end too.

This is purely from a business standpoint, but another question (assuming there is no provision in the contract for inflation adjustment) is whether there is going to be inflation and whether revenue from the game is expected to grow.

If you bring in inflation, the same dollar amount in the early part of the contract is worth more than that dollar amount at the end.  This is a very simple point, something that sports commentators ignore but which all businessmen (both the front office and the agents) are well aware of.  And its reasonable to assume inflation in the future, the question is how much.

If the sport continues to grow in revenue, the same dollar amount will make up a smaller proportion of the team’s revenue in the future as at present (and vice versa if the sports’ revenue shrinks).  However, you can’t really assume this like you can inflation.

In terms of player performance, the total amount spent on the player brings in the total amount of home runs, strikeouts, etc. during the course of the contract.  It is irrelevant whether the high and low points in salaries match each year’s performance. 

From a team’s standpoint, the reasons for structuring are inflation (which means you want to pay out most of the salary later!), and there may particular years you want a certain amount due to the team’s annual budget constraints (either self-imposed, imposed through a salary cap, or imposed by the term the team borrows money). 

It should be in the player’s interest to try to get everything up front on one lump sum, tempered by tax considerations, and the likelihood of the player blowing the money.  A player with alot of relatives should probably get the payments stretched out.  There is something to be said for a thirty year old player, whose performance is likely not going to get any better, signing a fifty year contract, so that if the team is going to pay the player $100 million he gets $2 million a year, for fifty years.  It would be nice to know that whatever happens, you get $2 million a year each year of your expected lifespan, though I would insist on protection against inflation and the chance of the team going bankrupt.