Isn’t the season over? – Who’s thinking of baseball now? We have basketballand football to watch. But with the annual winter baseball meetings under way, fans wonder whether the expensive long-term contracts their favorite team gives to big name free agents will give them the incentive to play hard. Are those big salaries worth it, especially when so many ordinary people are out of a job? This is a question we need a psychic to answer!
A new study confirms what most of us have suspected: According to economist John Solow, players who sign long-term contracts do tend to have a drop-off in performance in the first year of the new deal. He says, “Long-term fixed-salary contracts do provide an incentive to shirk. When we consider players who are not expected to sign a subsequent contract, these incentives lead to a large and statistically significant reduction in performance compared to expectations. The incentive to perform well in anticipation of signing the next contract is equally large and offsetting, however, so the players who expect to sign another contract largely play up to expectations.”
But Solow says the drop-off is not as great as fans might think. And whatever disincentives the player might face early in the contract, performance increases as the player starts thinking about his next free agent deal, eventually peaking in the so-called walk year of the contract. According to Solow, “Whatever incentive to shirk there might be is mostly offset by the fact that pretty soon, they’ll be signing another contract and if they don’t perform, it will be worse than the one they have now.”
The exception to this is the player nearing the end of his career and who is signing what will likely be his last long-term contract. In those instances, Solow’s study suggests that player performance stays below expectations throughout the contract, likely because the player no longer has an incentive to play for the next deal. He says, “You have to be careful to say they’re shirking because performance is very complex and many factors come into play.”
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