Using Free Agency to Assess the Valuation of Draft Picks in MLB

Gerrit Cole / MLB Amateur Draft - First Overall (2011)

Untelevised and hardly analyzed, Major League Baseball’s amateur draft is certainly less hyped than its cohorts in the other Big Four sports. But does a lack of coverage equate to diminished importance? Some will argue the affirmative, citing the unrefined skill of baseball draftees and the clouds of doubt that often surround their abilities to develop into full-fledged major leaguers. Such uncertainty is not necessarily characteristic of recently drafted players in the NFL or NBA, where a top pick can almost instantly contribute to his team.

Among others, however, this anti-draft sentiment is waning. The channeling of patience and resources into farm systems as a plausible explanation for the recent success of small-market teams such as the Tampa Bay Rays and Cincinnati Reds suggests that perhaps the draft can be a powerful vehicle in driving a franchise to success against the odds.

So, which philosophy ultimately reigns supreme in Major League Baseball? Have major league front offices placed greater value on draft picks in recent years? Though seemingly unrelated, we can use the free agent compensation system as a litmus for gauging the changing valuation of draft picks in baseball.

To explore this question, it is first useful to breakdown the convoluted free agent compensation system. Pursuant to the current Collective Bargaining Agreement, each year, the third-party Elias Sports Bureau designates labels of “Type A” or “Type B” to select, primer free agents. Type A indicates the player is in the top twenty percent of his free agent class, while Type B indicates he is within the top forty percent.

(Read how Type A and Type B free agents are chosen)

When a team loses a Type A or Type B free agent, it gains a compensatory supplemental draft pick in the amateur draft. In addition to this extra pick, teams losing a Type A free agent also receive the first round draft pick of the team signing that player.*

*As a caveat, the team obtains these picks only if it initially offered binding salary arbitration to this player as an alternative to free agency. Generally, (and in all the cases discussed in this column), teams indeed offer arbitration to designated free agents as a means of hedging its losses should the player sign elsewhere.

Thus, in our analysis, Type A free agents who have been offered arbitration will be of interest, as these players “cost a draft pick,” so to speak. Economic theory succinctly states that the cost of something is what you give up to get it. That is, not only should tangible monetary cost be used in the valuation of a commodity, but also the “opportunity cost” must be considered.

Therefore, the cost of signing a Type A free agent is not only the monetary value attached to that player’s contract, but also the perceived cost of the forgone draft pick. Singing a Type B or undesignated free agent costs a team only the monetary value ascribed to the player’s contract.



If draft picks are indeed gaining value in the eyes of baseball front offices, we should see that salaries of Type A free agents are falling at a greater rate than are the salaries of Type B and undesignated free agents.

In order to account for the fact that Type A free agents are likely better compensated by the very virtue of their Type A status, we will compare the changes in salary within player designation rather than across it

**It should be noted that the designation system is so warped that this clustering may not even be warranted. To this point, following the 2010 season, Ramon Hernandez received a Type A designation and Lance Berkman was deemed Type B. Case and point.

Moreover, this analysis will only consider the free agent market for starting pitchers for the sake of uniformity. To evaluate all free agents holistically would disregard the nuanced, unique value of players in each position. The following is data shows the average salaries for the 59 free agent starting pitchers from 2008-2010, sorted by free agent rating.

No Designation/Type B Type A 2008 $4,948,148.15 $18,166,666.67 2009 $5,132,456.14 $16,500,000.00 2010 $3,678,333.33 $14,333,333.33 Avg. % Change -12.30% -11.15%

Granted, salaries for Type A free agent pitchers have declined over the past three years, perhaps suggesting that draft picks are becoming more highly valued. However, given that salaries for both groups of players have declined at roughly the same relative rate renders market factors the likely driving force in the decline. In other words, the fact that these percentages are essentially equal indicates that the prospect of losing a draft pick is more or less negligible for teams signing Type A free agents.

So, what may be the cause of this phenomenon? Why might teams disregard draft picks in their assessment of free agent talent? For one, the uncertainty of the materialization of top draft picks is undeniable. In a Sports, Inc. article from Spring 2011, I noted that the average top five draft pick from 2003-2006 contributed .027 Wins Above Replacement (WAR) per game throughout the course of his career. Here, WAR was assessed on a “per game basis” to account for varying career lengths. To place that figure into perspective, that equates to a similar level of production as Minnesota Twins’ Nick Blackburn in 2011 (4.49 ERA, 1.60 WHIP). Acceptable? Barely. Profound enough to make a team think twice about signing a top free agent? Highly unlikely.

This scenario should cause top free agents to breathe a sigh of relief. The MLB Player’s Association has long contested the Elias ranking system as it (presumably) serves as a means of repressing the free agent market. Players fear our very hypothesis, that teams will consider the cost of relinquishing a draft pick before shelling out top dollar to Type A free agents. No need for them to worry though. The draft is hardly valued.