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The A-Rod Suspension and the New Moral Hazard

Alex Rodriguez has been suspended for the entirety of the 2014 season. You already know this, and if you haven’t yet, go read Wendy Thurm’s breakdown of the arbiter’s ruling for more information on the judgment itself. I’m not all that interested in talking about Rodriguez that much more, personally, as this is a story that has been so thoroughly covered that there just isn’t that much more to say.

However, I think that the precedent of the season long suspension, and the near unanimous agreement that we’re going to see significantly increased suspension lengths for failed PED tests in the next CBA, creates an issue that Major League Baseball is going to have to contend with eventually. As we’ve seen in the A-Rod case, the relationship between the team and the player has essentially disintegrated, as the interests of the Yankees were clearly aligned with the interests of Major League Baseball; both wanted Rodriguez suspended for as long as possible.

By virtue of the suspension, the Yankees have just received a $25 million rebate, which could allow them to get under the $189 million luxury tax threshold and lead to significant long term savings from the resetting of the tax brackets. After years of benefiting from Rodriguez’s on-field performance while he was presumably using PEDs, the Yankees are now benefiting from the fact that Rodriguez is being punished for using PEDs. And that is essentially the definition of a moral hazard.

A moral hazard is defined as a situation where one party making a decision is incentivized to take on undue risk because the cost of that risk will be paid by another party. It is a term most often used in the insurance industry, but the Yankees benefiting from Rodriguez’s suspension might be one of the best popular culture examples of the theory in recent history.

Because, as this suspension shows, the incentives are now almost entirely aligned for teams to (secretly, of course) provide aging overpriced players with access to as many PEDs as they want to take. If the player takes them and performs at a higher level, then the team directly benefits from the player’s PED use. If the player gets caught using PEDs, then the player is suspended without pay, and his contract is removed from the team’s books for the length of the suspension. The incentives created by Rodriguez’s suspension mean that, ethical principles aside, the Phillies should begin shipping Ryan Howard a daily crate full of steroids.

Right now, there is no system in place to punish the employers of PED users in any way, other than the possibility that they might lose a player in the midst of a pennant run if he fails a test during the season. Of course, even when that happens, as it did with Melky Cabrera and the Giants or Nelson Cruz and the Rangers, the team generally has the ability to make a trade that offsets the loss of the suspended player. The costs to a team of employing a PED user are just not very high, and now that MLB has a precedent for season long suspensions, the potential benefits to a team have increased if a player on an albatross contract starts using PEDs to try and delay their decline. The incentives are now strongly aligned for teams to want their overpaid former stars to start juicing.

If MLB gets an upwards adjustment in suspension length for failed drug tests in the next CBA, these incentives will only get stronger. Even if you don’t think that a team would go as far as to actually provide a player with PEDs, they wouldn’t even have to be directly involved in the acquisition process to potentially benefit. Once a player’s contract becomes an anchor on a team’s payroll, the organization would be similarly incentivized to leak information to the league about a player they have suspicions about, which could lead to an increase in the number of “random” tests a player is subject to, and an increased chance of that player being suspended and the team receiving a large rebate on the contract they signed.

This is all hypothetical, of course, but we don’t have to look too far to find instances of MLB teams exploiting bad incentive structures to their own gain. Even in the Masahiro Tanaka story, the league is concerned that teams might operate outside the agreed parameters of negotiations in order to funnel more money to Rakuten in order to land Tanaka’s rights, and the abuses of the international free agent signing system have been well documented by Ben Badler and others. It is simply poor policy to expect these organizations to act against their own best interests, and right now, it is in the best interests of the teams to have their unproductive expensive players use as many illegal substances as possible.

There are a few things MLB could do to reduce this moral hazard, though none are perfect solutions.

1. Require the team to continue to pay the contracted price for a suspended player, though in lieu of paying the salary to the player, the payments would then be evenly disbursed to their competitors within the same division. These payments would also continue to count against the luxury tax.

2. A team that has a player on its active 25 man roster that is suspended for using PEDs forfeits both their first round draft choice in the next amateur draft and the draft pool allocation that goes along with that pick. If a team’s first round selection falls between #20 and #30, then they also lose their second round pick, and the pool allocation for both of those selections.

3. A team that has a player suspended for PED use in the last year of his contract is forbidden from using the qualifying offer for that player and any other free agents it has in the upcoming free agent class, thus raising the cost of re-signing their own free agents, even the ones who didn’t get suspended.

The first rule would be the most fun, I think. Can you imagine the Red Sox being able to finance the acquisition of another player to upgrade their roster with money they received from the Yankees that would have otherwise been paid to Alex Rodriguez? Sending money to your direct rivals to help them beat you would be a pretty bitter pill to swallow, and the lack of financial relief from having your overpaid veteran get suspended would remove most of the poor incentives that are currently in place.

The second and third penalties may cross the line and push things into an area that could create unfair markets for players who might be incorrectly suspected of PED usage, and I’m not saying I necessarily support their adoption, at least not without the player’s association getting significant requests of their own baked into the next CBA. However, the first modification would only really have an effect on a team when a highly paid player is suspended, and wouldn’t do much to deter teams from wanting to employ low cost PED users, so perhaps an additional rule like #2 or #3 would balance things out a bit.

We’re almost certainly going to see big changes in the next CBA when it comes to the penalties for players caught using PEDs. Given the Rodriguez suspension and these changes, perhaps it is time for MLB to start thinking about penalties for their employers as well.