Why do MLB Draft Picks Hold Out for More Money?

The August 15th MLB draft signing deadline is fast approaching, and that means it’s time for my yearly gripe about players turning down seven figure bonuses in the hope of excelling for an independent league team and then getting a larger bonus the following year. Not only have the successful implementations of this strategy been moderate when compared to the catastrophic failures, but it is nearly impossible to justify the decision to re-enter the draft from an economic standpoint.

Imagine two players. Player A is a “risk-taker.” He is supremely confident in his ability and sure he will be an above average major league player. Player B is “risk-averse.” He lives in constant fear that an injury or other adverse event will end his career.

For player A the optimal strategy is to sign as quickly as possible in order to minimize the time until he becomes a free agent. When a player chooses to re-enter the draft he delays the start of his MLB career. That means he’ll become eligible for arbitration one year later, hit free agency one year later, and potentially retire having played one fewer year.  By re-entering the draft the player could effectively be giving up a year’s salary in the prime of his career (anywhere from $2m-$15m).

For player B the optimal strategy is also to sign as quickly as possibly. If player B wants guaranteed money because he fears injury, the best thing to do is accept the guaranteed money offered to him and not risk waiting another year.

Given that the dominant strategy is to sign, why do players still choose to re-enter the draft? The simple answer is that a player and his agent don’t have the same incentives.  For a player, the difference between $3.5m and $4m may not be worth the risk of getting nothing, but for an agent attempting to attract new clients and brand himself as “the biggest bonus-getter,” it’s important to make a splash. If the player happens to suffer an injury between drafts it could be catastrophic for his future earnings, but for the agent making 10%, it’s not a huge loss.  In general, holding out for the highest possible bonus has higher rewards and lower risks for the agent than it does for the player.

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