Dollars per WAR
When it comes to free agent signings, baseball fans love making snap decisions and playing GM. Some contracts, like Evan Longoria's or Ryan Howard's, are rather easy to judge. To objectively evaluate others, you need a whole lot of context. I'd like to provide a bit of that context using the informative and interactive Google Motion Charts. (If you want to view the charts, you need Flash, and if you're using Chrome, you need to open them in a new tab or incognito. For some reason, Google doesn't want its browser to have access to its apps.)
The baseball databank has salary data going back to 1985, and Sean Smith's WAR database well covers that time frame. As the Collective Bargaining Agreement stands, players in their first few years of MLB service time have their salary set by the team (league minimum $400,000). After that, players face several years where they are eligible for arbitration, and finally, with over six years of service time, they can become free agents. Here is how each group of players has been valued over time.
The less experienced players have seen their salaries rise steadily since 1985. But I'd like to focus more on the more interesting group of players who have over seven-plus years experience. Many mark 1998 as the year that baseball recovered from 1994. Indeed, from 1998 to 2003, the market rate for "free agent" WAR rose $500,000 per year, which signifies financial health. Consequently, over half of all MLB salaries went to these "free agent" players during the time period. However, these players produced approximately 75-80% of the league's WAR, whether they accounted for 40% or 65% of the league's salary. Free agents are no longer in vogue, as teams realize the value of the more inexperienced players, and are less willing to pay for for production from more experienced players. From the chart, you can see that over the last couple years, free agent prices might be on the decline, while cheap talent has become less cheap.
I'm also interested in dollars per WAR at the team level. I broke down the data into five increments of five years apiece stretching from 1985-2009, and found the average yearly WAR, salary, and dollars per WAR for all 30 teams. You might be familiar with a graph of this nature, plotting a team's payroll against a team's success.
This demonstrates the positive, non-linear relationship between pay and performance. The size of each point represents whether a point falls above or below an imagined regression line. I've highlighted both teams from Florida, and both teams from New York. The Marlins and Rays, occupied by the smallest dots, appear to get the most out of limited resources since 2005. But have they identified market inefficiencies, or are they just cheap? The Yankees and Mets portray the most bloated dots, and perhaps dole out the most bloated contracts. So are their payrolls' driven by reckless spending, or is the free agent market more practical to them?
In Baseball Between the Numbers, Nate Silver penned a seminal piece in which he stated that the marginal value of a win is most valuable for teams closest to the playoffs. Many point out that the more a team spends, the more it wins Few point out that the more a team wins, the more it should spend. Breaking the data down further, I ran the salary and WAR numbers by team for only players with over six years experience. This way, we can see if the Rays and Marlins have shrewdly spent in the free agent market, or if they simply stayed away from signing veterans altogether, thereby controlling costs. If the Yankees and Mets have been winning games by outbidding other teams in free agent auctions, they would be afflicted by the winner's curse. They would pay above-market rates for free agents. However, they do not, as evidenced by the color of their dots. The shading of each point represents the Dollars per WAR paid for a team's most experienced players. Due to their position in the standings, the Mets and Yankees find more value in the free agent market than others do, so New York teams allocate more resources in it. But they spend about as efficiently as others.
While the Marlins may spend their money efficiently, this is only because they more or less avoid free agents, not because they make wise free agent signings. In fact, the teams that have spent least on free agents over the last five years have been less successful when dipping their toes in the free agent waters. The average Dollars per WAR for seven-plus year players has been around $4.5 million, which shows up as greenish-yellowish in the chart. The yellow/red points indicate teams that have spent inefficiently on free agents. Turns out, Seattle, San Francisco, Baltimore, San Diego, Washington, Kansas City, Pittsburgh, and Florida have had the worst fortune in the free agent market. None of these teams have dabbled too heavily, but they've all paid well above market rate, and the Padres are the only one of them to have made the playoffs. Meanwhile, the Yanks and Mets pay right around market rate. The Blue Jays have somehow managed to acquire good, experienced players on the cheap.