Radical change: addressing fairness

Economists often wax poetically about institutions. They’re not talking about institutions like The Smithsonian Institution. What they’re referring to are “the rules of the game”—the underlying legal and social structure that defines how all parties operate in a given economy.

In baseball, institutions abound. The reserve clause, arbitration, and free agency combine (with some subtler rules) to form the institution governing player ownership. An even simpler example of an institution in baseball is the rule book, and as we’ve discussed here at THT, even the rules are sometimes decided more by the individual umpire than by the legal text. Yet another example of an institution is the practice of using the playoffs to determine the World Champion.

Recently, Commissioner Bud Selig has latched onto an idea that will expand the current playoff system by adding two additional wild card teams. Rather than focusing on how that affects the quality of the product or the money to be made, let’s consider the underlying issue, the reason he thinks a longer, more convoluted playoff structure is a good idea: fairness.

The very idea that diluting the playoff pool could be “fair” is the definition of specious. When Selig invokes fairness, he means that there is no easy solution to putting the Oakland Athletics, Cleveland Indians or Florida Marlins on the same competitive platform as the Yankees, Red Sox or Mets without performing serious surgery to baseball’s time- honored institutions. With Major League Baseball raking in money hand over fist, he has little incentive to even consider painful restructuring of the sport.

Thankfully, in the tiny corner of the Internet housing this article, the financial success of baseball can be ignored. So let’s get hypothetical. Let’s discuss what changes to the underlying institutions of baseball can be made to deliver a truly “fair” product.

To tackle this issue we need to set a goal. A fair-minded commissioner would focus on exploring ways to create an equilibrium payroll with a fairly tight range. Perhaps aim for 30 percent from the major league average payroll. For example, if the average payroll were $100 million, the range would be about $70 million to $130 million. Ideally, this would be done without a salary cap or floor, not even of the soft variety. This latter requirement, designed to prevent good players from being paid considerably less than their marginal revenue product (an economic way of saying “being paid what they’re worth”), would be the most challenging to achieve.

Following are some preliminary ideas to get the ball rolling

What if we shared most forms of local revenue?
This could be the trickiest and most important avenue to consider. If most monies go to an evenly dispersed MLB pot, payroll parity becomes a much simpler dilemma. The classic economic critique to this kind of suggestion is that it creates all kinds of incentive issues. If a club sends all or most of its local revenue to the central fund, what incentive does it have to maximize ticket revenues or launch and maintain regional sports networks?*

Clearly this requires considerable study. How do we offset bad incentives with good ones? Baseball could experiment with a system of dividends. For example, let’s say each club receives back 10 percent of the money it puts into the central pot. And let’s say dividend money can be used only for stadium maintenance, servicing debt, or paying owners. Is this enough to incentivize franchises? Or at least get the ball rolling? The real challenge is figuring out a system that pushes diverse franchises like the Yankees and Pirates to similar levels of effort.

Even if we can iron out the owner incentives, we’re a long way from fixing this thing. For one, the Major League Baseball Player’s Association (MLBPA) is probably pretty upset right now. So…

What if we radically altered service time concepts?
First the easy part. A player accrues a service year when he spends 60 days on the 25-man roster in one calendar year.

Now the hard part. Something must be done with the reserve clause.

Players currently live with a sort of indentured servitude during the first six service years of their major league career. Functionally, this often means the better part of seven major league seasons, since it is relatively easy to hold a player back in the minors for a couple of weeks in exchange for several months of additional control (see Buster Posey or Evan Longoria). For most players, their first three service years fall under the reserve clause. Clubs may reserve the player at any cost at or above league minimum. Salary for the final three seasons of club control is determined via the arbitration process, although players often settle for deals prior to their hearings.

This system isn’t exactly lauded by the players but serves an important function. In today’s major leagues, with incredible payroll disparities, cost-controlled player seasons are essential to the success of teams like the Tampa Bay Rays. However, if payroll parity exists, then the necessity of the reserve clause is diminished. Further, the MLBPA would require some concessions to allow the owners to radically restructure the league’s institutions. Making free agency more accessible to players should appease the union.

How do we address this? No first stab is going to come close to working, so let’s just start somewhere. Let’s say a club that drafts a player gets three seasons of control with a fourth season as a restricted free agent. In this example, a first year player earns league minimum. For years two and three, arbitration is used. Just like now, the two sides can agree to a settled one-year deal or a contract extension prior to the actual hearing.

For the restricted year, all clubs can negotiate one-year deals. The parent club owns the right to match the highest offer as well as sole right to offer a multi-year deal. The way these rules are designed should promote clubs keeping their elite talents while allowing a small army of role players to rove the league in free agency every year. Greater roster turnover should equal greater parity, no?

A comparative study on an unwritten rule of baseball.

Are we making progress? Here’s where a blue-ribbon panel would step in. Analyze the suggested changes to player ownership rules, find the holes and the good ideas, and develop yet another proposal. Then rinse and repeat until there’s a nice, workable option.

The primary concern here is maintaining draft pick value. Baseball must concern itself with recruiting as many top athletes as possible. Top athletic talent equals a better product. This means it must still be seen by the franchises as a positive investment to draft, pay and develop raw amateur talent. The secondary goals are to promote parity, create volatility in the standings year-to-year, and appease the players union by making players freer.

After we crush these two fundamental institutions, there are plenty of pieces left to pick up before Major League Baseball is re-invented as a fair and functional entity. Yet it also becomes easier to address the smaller issues. For example:

Balanced scheduling
Schedules should be balanced. Doesn’t this seem obvious?

Creating uniform rules
Do something with the DH. Everyone uses it, no one uses it, home manager decides pre-game, any option will do, just pick something. And please explicitly indicate if a tie goes to the runner.

The Rule IV Draft
Figure out draft pick trading rules. Avoid any kind of spending limits (especially since teams have a similar amount of money now). Perhaps allow some level of self-determination to the amateur players.

What else?
Clearly the above is merely a first step toward redesigning a new and fair Major League Baseball, one that promotes competition via an even distribution of resources. Now it’s your turn. Run with these ideas, polish them, break them down, reinvent them, introduce others, and report back. Let’s design a hypothetical league predicated on fairness, built on strong institutions and effective incentive regimes.

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Brad Johnson
Brad Johnson
I would consider a cap an emergency backup plan. I must admit, my economics background makes me extremely wary of market controls. I would much rather design a set of institutions that naturally led to a tighter spread in payroll rather than popping a cap on top of things. As you point out, baseball is the only major American sport without a cap, but it’s also the sport with the strongest player’s union. They will never sign off on a salary cap. It’s doubtful they’d even sign off on my idea, which is why I made free agency so much… Read more »

The easiest way to parity (or whatever you want to call fairness) is a salary cap.  MLB is the only American sport without one.  I know it’s nowhere near perfect and it won’t make Pittsburgh or Kansas City any smarter but ask yourself:

Are the Red Sox acquiring both Gonzalez and Crawford this week with a cap?
Are the Yankees perrennially in the playoffs without a payroll more than 4 times the cheapest teams?

Any argument you come up with for why a cap won’t work has to get past those two points.

I like these ideas. Some thoughts: All TV money goes into a central MLB pot, and then distribute equally. Each team would also be able to call on MLB or another owner to help negotiate their TV deals/build regional networks, since it’s in everyone’s best interests. Apparently San Diego and Tampa need this help. But for incentive, let teams keep all their stadium revenue. If an owner wants to make more money, improve the product and get fannies in the seats. Also, I think arbitration needs to go. What if the first 2 years of a player is at league… Read more »
Steve Adler
Steve Adler

Great work!  I really like your angle of finding a mid point and letting teams work within the range of that number.  That creates a cap and a floor, it would also allow that mid range number to move. 

The restricted FA year is brilliant

My one concern is too much roster turn over.  Fans typically like to identify with players and with this system it would see as though players would move even more freely than they do now. 

So…when do start?