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Arbitration in MLB – "File and Go" and Market Inefficiency January 27, 2009

Posted by tomflesher in Baseball.
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Ed Edmonds at the Sports Law Blog wrote up a piece on Tampa Bay’s “File-and-Go” strategy for arbitration. The blog references an MLB.com article; more information is available at USA Today, but I’ve preserved the text of the article here. Some thoughts on arbitration as market inefficiency, plus a haiku, behind the cut.

According to the MLB Players Association FAQ, about 12% of filed arbitration requests actually went to arbitration since 1990. From 1974 to 2006 (inclusive), the overall record was 269 arbitration decisions in favor of the club to 199 in favor of the player. Whether that represents better statistical methods by the clubs, players overvaluing their contributions systemically, an inefficiency on the part of the arbitrators, or simply more effective rent-seeking on the part of the clubs is difficult to determine.

The 88% of cases that were filed but not arbitrated since 1990 were settled – that is, either the player and the team came to an agreement or the player was otherwise disposed of (say, in a trade).

A very simple model of negotiation involving arbitration might work like this:

  1. Player and agent prepare request.
  2. Team prepares first offer.
  3. Agent and team negotiate.
  4. If the numbers are close, a compromise can be reached through negotiation with a given amount of transaction costs.
  5. If not, further negotiation, with additional costs, can reach a compromise.
  6. If no compromise can be reached, arbitration is filed with team offer T and player offer P; negotiations continue, with marginal transaction costs accruing. T is considered the minimum, and P represents a marginal increase. The expected salary value is T + [(P-T)/2].
  7. Each side argues at arbitration, and a solution is reached which favors one side completely over the other. Thus, (P-T) is allocated entirely either to the player in salary or to the team in surplus.

Under File-and-Go arbitration, step 6 is truncated; there is no marginal cost of additional negotiation because negotiation is stopped. Otherwise, the marginal costs are similar to the standard arbitration strategy.

Edmonds points out that the two players who are in arbitration with Tampa Bay this year, Willy Aybar and Dioner Navarro, made offers that were very close to the team’s offer. My conjecture is that they understand that the team’s probability of winning arbitration is greater than the player’s, all else being equal, and have made an effort to come close to the team’s offer. Tampa Bay, meanwhile, does not seem to be extracting rent in the form of very low offers; thinking at the margin, one of the most efficient teams in the league will likely save $550,000 by making reasonable but low offers.

The arbitrators are also likely to rely on traditional statistics, rather than more recently developed sabermetric statistics. It would be interesting to see what kind of record the Red Sox and the As have in arbitration.

Navarro and Aybar are making a departure from the strategy of my second-favorite player, inept catcher Josh Paul, who employed the tactic known to the Greeks as “asking for way too much given his history.” Paul was offered salaries near the league minimum after being best known for failing to tag AJ Pierzynski in the 2005 ALCS. The play led to Chicago defeating Paul’s Angels; Chicago then went on to win the World Series. He asked, in both cases, for roughly double the league minimum and was denied both times.

Good-faith team offers
Rewarded by arbiters
Josh Paul is inept

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