I initially created Baseball Graphs to develop new and better ways of presenting baseball statistics. The 2003 season was my first full-season attempt, and it turned out pretty well. I now spend a lot of my time creating and formatting the baseball stats at The Hardball Times.

Along the way, I've also picked up the writing bug. I spend most of my energy writing for THT, but sometimes I like to write about more geeky stuff, baseball research and things like that. That's what this blog is for.

I'm very interested in graphics and other information display, so I'll probably post links to creative stuff like that. I also plan to write historical articles that complement the historical graphs. And I have inexplicably developed an interest in baseball win-related stats, such as Bill James's Win Shares and something called Win Probability Added. So you can expect a few posts about that stuff too.

If you're interested, I've created a complex spreadsheet full of WPA logic, which you can download at ftp.baseballgraphs.com/wpa. If you'd like to read more about Win Shares, try these links:

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Baseball Economics

December 02, 2006

Money, money, money

There has been an excellent thread about baseball financial economics over at The Book Blog.  Scroll down the comments to see some terrific dialogue about why teams spend as much money on free agents as they do.

My basic contribution is that I think most team owners aren’t as motivated by year-to-year profitability as they are by long-term franchise value appreciation.  And the two don’t track together as tightly as you might think.

One reason they don’t track tightly together is that demand for baseball teams seems to be outstripping supply such that the average value of a major league franchise has increased roughly 10% in the recent past (see Tango’s comments in the thread).  And I believe teams are motivated to spend most of their year-to-year revenue on players to enhance the value of their franchise as much as possible.

As J.C. has pointed out, this flies in the face of good economic reasoning, because players will be signed at salaries that outstrip the marginal impact they have on revenue.  But when owners only see cash going out when they buy a team and cash returning when they sell it, year-to-year profitability and marginal revenue means less to them.  After all, most teams aren’t publicly traded, nor do they pay out dividends.

Put another way, owners are indeed motivated by profit.  But profit to an owner occurs when the franchise is sold, not in annual dividends.  If you think of a baseball team as a piece of art that is bought and sold and generates little profit in between, you’re probably close to the mindset of an owner.

As Phil Birnbaum points out in the comments, ego is certainly involved too.  What owner wants to be associated with a losing team?  And Guy makes an excellent point that spending most of a team’s incremental revenue on players is probably in the best long-term interest of major league teams because it stifles potential competition from other leagues.  In other words, players aren’t likely to jump ship to another league if their income is maximal.

The strength of the player’s union is definitely a factor, too.  The most recent Collective Bargaining Agreement included a settlement for collusion between owners in 2002.  One gets the impression that anything owners do to keep salaries under control will get very close scrutiny from a lot of lawyers.

Anyway, given all of these factors, how should we judge these most recent contracts?  By asking ourselves how much these deals will (or won’t) enhance the value of the team in question.  I guess I’d look at a few things:

• How is the “brand” value of the franchise doing?  Example: the Cubs have been eclipsed in Chicago by the White Sox; their brand value is lagging.
• Will a targeted player improve the franchise’s brand value?  For instance, will Alfonso Soriano pique interest in the Cubs and will he improve their chances of winning?  (Winning games is the best way to improve the standing of your club).
• How’s your current supply of players and how well positioned are you to contend next year?  If you’re not ready to contend, spending a ton of money on an uber free agent probably isn’t worth it.
• What’s the current price of free agents, and what’s your assumption about future player salary inflation?  If you think inflation will be high, you’ll be more willing to sign a long-term contract.

If someone is considering a purchase of your team, they will value a strong “brand” in the community as well as a good stable of players locked into low salaries (relative to the market salary of players, and adjusted for inflation) for more than just the short term.  They will hate bad players locked into relatively high salaries for a long term.

Anyway, that’s my thinking as it stands right now.  I’m sure I’ll learn more and change my mind as I learn more from my fellow posters.

If you’re interested in this stuff, here’s an article about a Billy Beane lecture to T. Rowe Price.

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