Does a salary premium exist for offensive output in Major League Baseball?. Issue 3 (22nd September 2020)

• Record Type: Journal Article
• Authors: Ehrlich, Justin; Perline, Justin; Potter, Joel; Sanders, Shane
• Is Part Of: Managerial finance. Volume 47:Issue 3(2021)
• Page Start: 326
• Page End: 335
• Publication Date: 2020-09-22
• Subjects: MLB -- Baseball -- Salary -- Baseball labor market -- Payroll -- Wins Above Replacement (WAR) -- Win maximization; J24 -- J31 -- L83; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-04-2020-0186
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: In baseball, a run scored on offense carries the same on-field (win) value as does a run prevented on defense. Both outcomes bear the same score margin implication. This presumption of unit equality is implicit in the Wins Above Replacement (WAR) measure, which treats units of offensive WAR (oWAR) and units of defensive WAR (dWAR) as perfectly substitutable toward win production. The purpose of this paper is to ask whether the salaries of Major League Baseball (MLB) players reveal such an equal valuation among MLB teams. Design/methodology/approach: The authors examine the relationship between offensive output, defensive output and subsequent salary from free agency in MLB using a set of log-linear OLS, fixed effects regression specifications. Findings: In general, estimated annual salary from free agency increases significantly and substantially with unit increases in a player's (prior season) wins above replacement WAR. Across specifications, the authors estimate a 42.5–43.4% increase in salary for year t for each additional unit of WAR in year t −1. The authors disaggregate WAR into offensive and defensive components (oWAR and dWAR) and estimate a 52.4–53.3 (4.8–7.2)% increase in salary for each additional unit of oWAR (dWAR). Originality/value: The efficiency of the baseball labor market has been studied previously with mixed results. The novelty of the present study is its treatment of inputs not as positions or individual players but as the underlying offensive and defensive win production of players. The authors estimate free agency salary returns to (contract season) oWAR and dWAR in MLB to establish whether (to what extent) a salary premium for offensive output exists within MLB.