The Dollar Value of Opt-Out Clauses in Player Contracts
There was a great article on mlbtraderumors.com today in which Matt Swartz attempts to put a present dollar value on the opt-out clauses contained in the free agent contracts signed by David Price, Johnny Cueto and Jason Heyward. It took a little while for me to get my mind around his methodology, but once I did, it was pretty straightforward.
The up-shot is that Swartz values the opt-outs at $17 million for each of Price and Cueto and $25 million for Heyward’s two possible opt-outs. Swartz argues that the Red Sox, Cubs and Giants theoretically saved these amounts by granting the opt-outs over the amounts that they would have had to guarantee to get the player to sign an agreement without an opt-out and thus save teams money in the near term.
Since we are not living in a world in which teams have complete knowledge regarding what other teams are offering as contract terms to free agents — this is the result of collective bargaining and the collusion era where teams were sharing information about contract offers and then all bidding the same below-market amounts, so that free agents really only had a choice over where he wanted to play most for the same money; teams aren’t allowed to share this information under the parties’ collective bargaining agreement which has been strongly enforced by the several mid-1980’s arbitration decisions concluding that the teams were colluding — teams can still make offers that are well above market in the sense that they bid well more than the amount necessary to constitute the best offer for the player’s services.
My past complaints about opt-out clauses were mainly due to the fact the teams that initially offered the opt-outs had already submitted the largest cash guarantees by far, such that the opt-outs became wild over-payments for the players in question. Once one or two teams offered these deals, then they quickly became the new norm, forcing other teams to offer opt-outs to most of the most elite free agents or prospective free agents.
However, if Swartz is relatively on the mark with his estimates, then teams can, and some probably already are, calculating the values of the opt-outs they are offering. At the end of the day, the owners really deserve no sympathy over the fact that teams sometimes make free agent contract offers well in excess of what is actually needed to make the best offer, because the teams are responsible for the current system which denies them perfect knowledge of other teams’ offers.
If the owners had not colluded to hold down free agent contracts 30+ years ago, they would likely have a greater ability today to confirm whether free agents have actually received the salary offers and contract terms player agents claim. On the other hand, competitors in other industries usually do not share information directly about their contracting offers, particularly when competing over the same pool of materials, land or prospective employees.
The difference in baseball is that MLB is a rare legal monopoly where rational behavior dictates that team owners would collude to hold down player salaries if it were possible for them to do so without adverse consequences. Under the collective bargaining agreement enforced by binding arbitration, the owners can’t.