The Real Market Inefficiency

Without question, one of the most incredible achievements in baseball during my lifetime was the Braves winning 14 consecutive division titles between 1991 – 2005. There’s an asterisk, since in 1994 the season ended early with the Braves six games back, but what doesn’t count officially doesn’t count officially, and it’s not even like 14 out of 15 is all that much less impressive. Anyhow, another contender is this: since 2008, the Yankees have won the most games in baseball, with 564. The Rays have won the second-most games in baseball, with 550. Over that span, the Yankees have out-spent the Rays by more than nine hundred million dollars.

There’s always been concern over the difference between the Haves and the Have-Nots, and that concern is alive and well today, with the Dodgers having established themselves as a league elite. When it comes to payroll, baseball is far from an even field, and I have a pet theory that over time, as teams get smarter and smarter, the differences between them will get smaller and smaller, and success will correlate more and more with spending. Lower-budget teams, right now, have to focus on so-called market inefficiencies. But while it’s easy to get caught up in the details, perhaps the greatest market inefficiency of all is spending big money in general.

None of you need to be reminded that there is a relationship between team payroll and team success. Of course there is, and there always has been, and there presumably always will be. Money lets you do things other teams can’t afford, good things, and this is precisely why many people are worried about the current state of payroll imbalance. But if you grant the relationship, the important question asks of its strength. A strongly positive relationship suggests a problem. A weakly positive relationship suggests that things are kind of okay.

I grabbed team data from 2004-2013, covering the entirety of the last decade. I collected winning percentages, and I collected Opening Day payrolls. For each season, I examined the relationship, and the important bits are in the table below. We’re looking at winning percentage vs. money spent.

Year R^2 Slope $m/Win
2004 0.29 0.0014 4.5
2005 0.23 0.0009 6.5
2006 0.29 0.0010 6.0
2007 0.25 0.0008 7.4
2008 0.10 0.0006 10.6
2009 0.23 0.0010 6.2
2010 0.14 0.0007 9.4
2011 0.17 0.0007 8.8
2012 0.04 0.0004 15.7
2013 0.11 0.0005 11.5

The average of the second column is 0.18. The average slope is 0.0008, meaning on average, an extra million was worth an extra 0.0008 of winning percentage. The last column is just the average cost, in millions, of a single extra win. It’s another indicator of the flimsiness of the relationship. In large part thanks to the Rays and the A’s and, recently, the Pirates, money has been a less significant factor than one might otherwise expect. It might feel like it’s a small sample being skewed by a few exceptions, but then, those teams are actively proving what’s very much possible.

Spending more helps more than it hurts. It helps less than it ought to, were everyone and everything behaving optimally. And that could be the very issue. If you think about it in the simplest terms possible, players are relatively cheap through their first six or seven years of team control. If they debut in their early 20s, that time runs out somewhere in the vicinity of 30. So when players start getting paid free-agent money, they’re usually getting worse, their peaks right behind them. And the best players demand long-term contracts, sometimes up to and exceeding ten years in length, and those have turned out pretty poorly in the past. You’d just pretty much always rather take a shot on a guy in his 20s than on a guy in his 30s.

When a team has more money, it can convince itself to spend it, and that’s practically beginning from an inefficient place. It might spend more on a “proven” player, or it might spend more to have a star player while the star is actively fading. When you have less money, you can’t afford to be anything but cold and objective, and you can’t afford so much to worry about labels like “proven” or “durable”. Having less money can force you to be bold, if sometimes a little unfeeling. If the Rays had more money, perhaps they wouldn’t have traded James Shields like they did. Perhaps they wouldn’t be thinking so hard about trading David Price. The Shields trade was, without question, brilliant for the organization. As long as other teams prefer to act conservatively, there’s a setting to be taken advantage of.

Some time ago I was reading about a theory that cap teams in the NHL aren’t really at an advantage over teams that spend short of the cap. Spending less, in theory, forces a team to make smarter decisions, while spending more, in theory, allows a team to be a little more careless. This is more or less the same idea, and while I can’t really prove it, it makes intuitive sense, at least given the way things are right now. Teams with big money don’t take enough advantage of it. Teams with less money have to be more vigilant about maximizing their results. Individual factors are overvalued and undervalued, but the real inefficiency is just spending more. The ways in which that’s done are just subgroups.

It might be that baseball can have only a limited number of successful smaller-market teams, since there are only so many cheap, good players to go around. Maybe there isn’t room for another Tampa Bay or Oakland. Maybe there’s room for one, but not another two or three. It’s not like every single team in baseball can think about cutting back and expecting promising results, and really there’s only going to be more spending with all the money making its way into the game. The overall financial landscape has never been more healthy.

And this could be a blip on the way to a more worrisome MLB future. Spending limits on the draft aren’t good for lower-budget teams. Spending limits on international markets aren’t good for lower-budget teams. Teams, by and large, are still getting smarter, and what we’re seeing are older players hitting free agency and more young players getting extended before they reach the market. Teams, all teams, very highly value the draft picks they might lose by signing certain free agents. If everyone puts an appropriate premium on talented, cost-controlled youth, it’s going to be that much harder for smaller-market teams to exploit the competition.

But at least right now, and at least for the past few years, there’s been a big difference between high and low payrolls, and there’s been a smaller difference between high and low effective payrolls. The poorer teams have been forced to act more rationally by their own budget constraints, and the richer teams have just spent on things they maybe shouldn’t have spent so much for. It’s good, of course, to have money. Better to have more of it. But the underdogs have strengths of their own.



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Jeff made Lookout Landing a thing, but he does not still write there about the Mariners. He does write here, sometimes about the Mariners, but usually not.


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