Pollis: What’s really behind salary inflation in MLB

From SABR member Lewie Pollis at Baseball Prospectus on December 24, 2014:

Nary a year has gone by in recent memory in which I can’t remember people talking about the growth in player salaries. Every offseason, it seems, we expect the free agent market to explode. In years with weak free agent classes we anticipate that the low supply will drive up wages; when there are several premium players available we say that the high talent level will lubricate teams’ wallets, or something. Then, after we see a couple second- or third-tier free agents get significantly more than anyone had expected, there’s a fear that that year’s inflation will be even higher than we’d thought. It’s one of the many cyclical talking points in the community of baseball analysis (I say this with love).

The typical explanation for why salaries have grown is the ever-increasing pool of money in baseball. I certainly wouldn’t deny that it’s a factor, but there’s more to it than that. Any economist worth his or her salt will tell you that having more money doesn’t necessarily mean that it’s rational to spend more money. And besides, MLB team owners aren’t your typical corporate executives whose overarching goal is to maximize profits — much (if not most) of the value of a win to an organization comes not from increasing revenues but from the sheer joy of winning. We on the outside can’t tell teams how they should value a win (as distinct from how much they should pay for them) when its worth is largely subjective.

But if there’s more behind salary inflation than the influx of money in the game, what else is going on? I’ve developed a theory that I think can explain both what’s driving the increases in the cost of a win and why the inflationary pressure manifests itself in inconsistent ways. At the heart of my explanation is the economic phenomenon known as the “winner’s curse.”

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Originally published: December 29, 2014. Last Updated: December 29, 2014.