Economic Theory and Player Movement Throughout Baseball History
With the end of the World Series last Wednesday, the season is over and the Hot Stove League has begun. While there has always been a Hot Stove League, the general feeling is that it has become more intense since the advent of free agency since a plethora of players are easily available to any team. While free agency has perhaps made the winter more interesting, it's debatable whether it's improved the game overall. One of fans' biggest complaints is the effect it's had on increasing player turnover. It's reputed that today's players change teams so often that year-to-year continuity is lost. Of course, just because players are reputed to change teams more often doesn't make it so. There was plenty of player movement in the pre-free agency era from trades, player sales, players being released, etc. So have things really changed? And if so, for which types of players are things different?
In the Wages of Wins (excerpt here), the authors cite the Coase Theorem and the Rottenberg Invariance Principle to argue that free agency has not changed the distribution of MLB players and that player movement remains the same as it would be under the reserve clause. These theories, they say, debunk claims that the free agency allows players to move too freely and kills competitive balance. According to Rottenberg's economic theory (posited in 1956), "a market in which freedom is limited by a reserve rule such as that which now governs the baseball labor market distributes players among teams about as a free market would." As a baseball fan, I tend to not quite believe that player movement would be the same under the reserve clause vs. free agency. To test this out, let's take a look back through history.
I examined all players in the modern baseball era and measured the turnover rate of all MLB players. The key measurement was what percentage of players changed teams each year?
The graph below shows the percentage of players who changed teams in a particular year. The data is smoothed to be a 5-year average of this turnover rate. As you can see, the early days of baseball were very unsettled, as leagues were forming and rules on player movement were being established. By the end of the first decade of the 20th century, however, things had settled down. This changed once again with the introduction of the Federal League and the turnover rates spiked dramatically during the years between 1914-1916.
From the 1950's through the 1980's, the level of turnover fluctuated between 30%-35%. There was indeed, no noticeable bump in player movement during the first few years of free agency. The late 1980's however, saw a dramatic shift in the increase of player movement, continuing through the 1990's and 2000's. These decades saw player turnover hit almost 45%, meaning that from one year to the next, a club could have nearly half its roster changed around.
What About Star Players?
As a fan, I wouldn't really mind this as long as the key players remained constant. Were the players moving around team stars, or were they bit players and scrubs? The graph below shows the data split into four groups: Players who were worth less than 1 Win Above Replacement (WAR) in the previous year, players who were worth between 1-3 WAR, players who were worth 3-5 WAR, and players worth more than 5 WAR in the previous year. Each team usually has about half of their roster made up of players with WAR>1, several players worth 3-5 WAR, and just a couple of elite players worth greater than 5 WAR.
As we can see from the graph, the roster turnover for each type of player follows roughly the same pattern throughout baseball history. We can also see that, not surprisingly, the scrubs have a far higher turnover rate. For the bulk of baseball history, about 40% of these lower-tier players changed teams from one year to the next. For players who are real contributors to the team but not stars, this number drops to about a 20% player turnover rate. The handful of team stars usually changed teams about 10% of the time, while truly great players changed teams just 5% of the time. We saw an initial increase in player movement in the first years of free agency, particularly among better players, but this decreased again by the 1980's.
However, this all changed during the 1990's. In 1988, the (5-year average) rates were in line with the rest of baseball history. However, after the end of MLB collusion, the rates skyrocketed, particularly for the best players. By 1997, the landscape was entirely different. While the turnover rate for poor players increased somewhat from 41% to 50%, the turnover rate for 3-5 WAR players nearly doubled from 11% to 19%. For the truly elite, the turnover rate increased even more dramatically, going from 4% to 17%.
I'm not quite sure what caused this surge. Obviously, the lack of owner collusion was a big part of it. It was also during this period that salaries truly exploded and small-market clubs began to be unable to keep their star players. Prior to this period, most teams were able to sign and keep their stars if they so chose. But during the 90's some teams became simply unable to afford to sign their own top talent. This high turnover trend continued through much of the 2000's as well. Interestingly, and probably not coincidentally, this period of high turnover also coincides with baseball's period of greatest concern over parity between teams.
For fans, this high turnover rate is very disheartening. Having a 15-20% chance that your team's MVP-caliber player will fly the coop every winter is no way to go through life. Fans, being human, become attached to their teams stars and are disappointed when they leave in the prime of their careers.
However, there are signs that this trend has begun to reverse itself. Teams now seem more willing to lock up their stars to long-term contracts and elite player movement has been on the decline. Fewer teams seem willing to build through free agency, and thus more players are staying home. Average turnover rate has declined as a whole over the past 4 or 5 years. Turnover rate, particularly among star players, is back down to its late 1980's and early 1990's level. My data does not include the 2008-09 off-season, but there is reason to hope that player movement is on the downswing.
Another way to analyze the data is by the number of years of service. While service year data was not available to me, I estimated it based upon the playing time for each player. The graph below shows the data based upon service time completed in the Majors for players who earned at least 1 Win Above Replacement in the previous year.
As we can see, the amount of player movement among players with 0-5 years of service is basically unchanged throughout baseball history, hovering about 10-15%. Also discernable from the graph is that veteran players have always been more likely to change teams than younger ones. As one might expect, players with 6 or more years of MLB service increased their likelihood of changing teams dramatically after the advent of free agency. Of course, this makes sense, since these are the very players who are eligible to be free agents. This number starts to increase at the beginning of the free-agent era, but particularly skyrockets during the late 1980's and 1990's. Players with 6-9 years of service went from about a 20% turnover rate in the late 1980's to a 35% turnover rate by the late 1990's. Here we see proof that the increase in player turnover is almost entirely coming from players who are free agent eligible.
As we can see, clearly there have been significant changes in player movement over time. A lot of these changes have been due to free agency. This has particularly manifested itself with players who are eligible for free agency (obviously), and with players who are especially valuable.
Though free agency surely played a part in this transformation, it's interesting that the turnover rate increased most prominently in the late 1980's, not at the beginning of the free agent era. There could be a few possible causes of this. Did players and teams take several years to figure out the free agent system? Did owners participate in collusion during the early 1980's as well as from 1985-1987? Or were other factors independent of free agency at play to create the increase in player movement? The bump in veteran and star player turnover at the beginning of free agency as well as a skyrocketing effect in the late 80's through today gives a hint that free agency likely played a large part in the changing player turnover rates.
So is the economic theory wrong? Not really. Both economic principles outlined earlier assume that things stay the same only if there are no transaction costs. But in Major League Baseball there are significant transaction costs and other barriers. Rottenberg's economic theory would argue that if the reserve clause still existed, the best players would still end up on the Yankees because the Yankees could buy or trade for the players directly. In reality though, the Yankees cannot simply buy Joe Mauer from the Twins for $50 million dollars. The Commissioner's Office would never allow it. Additionally there is the time and hassle that comes with identifying potential trade partners and hammering out a deal. Finally, no small matter is that selling Mauer would come at a significant public relations cost to the Twins, hence discouraging a deal. These restrictions are the reason why the Yankees haven't bought Mauer already and simply will wait to sign him after he becomes a free agent.
In theory, if no transaction costs existed we probably wouldn't see the dramatic differences in the graphs that we do today. However, the significant costs and barriers to the buying and selling of players means that the reserve clause likely does limit player mobility. Even so, we have seen a significant reduction in player mobility in the last few years. It will be interesting to see if this continues, and as a fan I hope that does.
Early and late 60's, late 70's: expansion teams
But what happened around 1936-1940? Maybe the Great Depression took a few years to make owners (not just Connie Mack) have to do trades that were disguised salary dumps.
Posted by: Gilbert at November 10, 2009 9:18 AM
this is great stuff.
Posted by: eric g. at November 10, 2009 11:15 AM
Great research, but this section in the conclusion left me confused: "In reality though, the Yankees cannot simply buy Joe Mauer from the Twins for $50 million dollars. The Commissioner's Office would never allow it." But isn't this only true currently? Certainly MLB teams routinely bought contracts outright before free agency (like Babe Ruth); I'm not clear on when the Commissioner began exercising his power to nix trades where the exchange was purely money for player, but they have happened. I don't see how we can surmise that, if the reserve clause was still in effect, these sorts of transactions wouldn't occur (Dave Winfield was traded from the Twins to the Indians straight up for cash and a dinner in '94).
Posted by: Karl at November 10, 2009 3:43 PM
Thanks for the comment Karl. It's true that teams did buy contracts of valuable players outright in baseball's olden days. The ability to do so did make it more of a free market. I'm not sure when this practice stopped, but it's been a long time (Winfield was past washed up when that deal was made, so that's not really evidence).
The fact that Hanley Ramirez (or any other young star on a small market team) are never sold to a big market club for massive amounts of money is indication that these deals are not allowed. Instead they wait until the player is a free agent.
If these sales were allowed, then the Rottenberg theory would hold far more true to form. We'd see stars of all ages being sold routinely and all the best players would still end up on the big market clubs.
Posted by: Sky Andrecheck at November 10, 2009 4:16 PM
Oh, I don't dispute that those deals cannot happen now. What I'm wondering is how much that has to do with the rise of the Player's Union and the end of the Reserve Clause. That is, was this a rule that came about when this sea change in players' power occurred, or was it totally unrelated?
Whatever the case, this is the system we're working with now, and I think your general observations hold true. All teams (including the Yankees) have become more leery of trading young, high-upside talent for accomplished veterans, and I think even anecdotally, one could match that change in behavior with that downward trend on your graph starting around 2000.
What is interesting is, if MLB were to ever institute a hard cap like the NFL, you would probably see player movement spike dramatically, which would certainly bother a lot of folks.
Posted by: Karl at November 10, 2009 5:35 PM
But if you are worried about he impact of free agency, earned in 1975 and in place for 1976, what are your inferences?
Turnover rate fell from 1976 to 1984
The same is true regardless of WAR
The same is true even longer by years of service
This does not debunk Rottenberg's invariance principle.
It is certainly interesting that dramatic increases in turnover are occurring recently. But it seems important to point out that this is quite removed in time from the imposition of free agency!
Posted by: Rodney Fort at November 11, 2009 9:01 AM
Sky, this is just awesome. This is a great application of the Coase Theorem. It's not easy to understand or explain to people (one of the hardest things to teach undergrads in my experience), but you did a great job here being clear and leaving the reader with an understanding of the theorem and baseball labor markets. This article is fascinating and it's clear you just know what you're talking about. Great work.
Posted by: Matt Swartz at November 12, 2009 6:36 PM
Matt, Thanks very much for your kind words - I'm glad you enjoyed the article.
Rodney, You are right that the effect did not take hold right away. There was a bump (not a huge one, but still a bump) in the late 70's among veteran and high skilled players. Then it went back down again - my guess is that it was due to MLB owner collusion. After collusion was busted high WAR players and particularly veteran players' turnover skyrocketed. I think free agency is a pretty good reason why 6+ players are leaving at such a high rate. Due to the delayed effect, I'll agree it's not a 100% proof, but it builds a pretty good case.
Also, my conclusion wasn't totally debunking the Rottenberg principle. It was just debunking the application of it to baseball as it exists today, due to the high transaction costs and barriers that exist. Take away those barriers, and I'll bet it would hold
Posted by: Sky Andrecheck at November 13, 2009 10:09 AM