Quinton: Behavioral economics and the rise of the player opt-out

From Jeff Quinton at Baseball Prospectus on December 28, 2015, with mention of SABR members Rob Neyer and Eno Sarris:

“The logic of the opt-out clauses for the club escapes me.” —Commissioner Rob Manfred

Nothing gets the baseball internet writer hot like a newly popularized contract structure. Rob Neyer has weighed in on the potential benefit to team of a player opt-out, and Dave Cameron* has weighed in on how these cannot be seen as anything but additional costs. Neyer’s point is that giving a player an opt-out is often preferable to giving a player more money. Cameron’s point is that giving a player an opt-out is less preferable than not giving a player an opt-out. Both points are correct. Like most things, if we change the perspective, then we can look at anything as a positive or a negative. More simply, everything is better than a worse scenario and everything is worse than a better scenario.

So why the need for another article? Because unaddressed remains the most curious question about the player option: Why has it become so popular? Put differently, what benefit does the structure provide for each side as an alternative (in most mega-deals) to just agreeing on more money? We will take a look at what is in it for both parties and see what we can find.

Going back to Neyer’s assertion—that teams prefer giving such an option to giving more money—well, that comes with a big ol’ “it depends.” My guess is that teams perform some sort of analysis and put a value on offering a player option for each year of the contract (something similar to what was done by Eno Sarris, probably including the frictional costs mentioned by FanGraphs commenter Josh), and then negotiate with that cost in mind. For example, if a team values an opt-out for a specific player at year three of a six-year contract at $12 million, they would be indifferent to the choice between a six-year, $132 million contract with no opt-out and a six-year, $120 million contract with a player opt-out after year three. All this is to say that teams would prefer giving a player option to giving more money to a point.

So, either contracts with player options are falling more and more on the “more favorable than paying more” side of this cost-benefit analysis, or players value the opt-out more than teams do. First, we’ll take a look at this from the players’ perspective.

Read the full article here: http://www.baseballprospectus.com/article.php?articleid=28112

Originally published: December 28, 2015. Last Updated: December 28, 2015.