INEFFICIENCIES IN THE MLB LABOR MARKET RELATED TO SALARY ARBITRATION
- Area of Honors:
- Bachelor of Science
- Document Type:
- Thesis Supervisors:
- Dave Ryan Brown, Thesis Supervisor
- Russell Paul Chuderewicz, Honors Advisor
- Professional sports provide opportunities to examine uniquely transparent labor markets. In particular, Major League Baseball exhibits a peculiar process known as salary arbitration. The Major League Baseball Collective Bargaining Agreement outlines this arbitration process, which is available to certain players who have not yet reached eligibility for free agency. This process elicits offers from both the team and the player for a one-year contract, and the arbitration panel assigns whichever offer they feel is closer to the true value of the player. This paper seeks to demonstrate the inherent opportunity for inefficiency that exists as a result of this arbitration process and quantify the consequential individual and league-wide misallocations of funds. As a means of analysis of these misallocations, salary will be modeled as a function of performance statistics for players eligible for free agency. These models will then be used to predict salaries for players that went through arbitration and players eligible for arbitration who avoided the process. These salary projections will be used to estimate the misallocations for players who go through arbitration and compare them to similar estimates for those players who avoided the arbitration process, thus providing a clear picture of the inefficiency of the arbitration process.