The Impact of the Long-Term Contract in Major League Baseball

Buster Posey didn't need free agency to land his big deal.

With the recent contract extensions awarded to Tigers’ ace Justin Verlander ($180M/7 yrs) and Giants’ MVP Buster Posey ($167M/9 yrs), it’s hard to ignore what has become a powerful trend in Major League Baseball. Teams are locking up their young talent as we rapidly approach what Grantland’s Jonah Keri calls “the death of free agency.” The list of homegrown stars that have recently signed long-term extensions with their clubs is vast, highlighted by names such as Joey Votto, Felix Hernandez, and Evan Longoria.

Changes to the recent CBA, coupled with a new TV contract for MLB, have fueled this trend on both the supply and demand sides of baseball’s labor market. New luxury tax incentives to reduce payroll, as well as a revamped free agent compensation system that raises the implicit costs of signing a player, have created new risks for players entering free agency Rather than test this tenuous market, players are wise to ink lucrative deals as soon as they become available. Further, small-market teams, anticipating their equal share in MLB’s forthcoming massive TV contract with FOX and Turner Sports, are more willing than ever to pay a hefty price to keep their young talent.

So the stage is set for an era of parity in baseball. It’s no coincidence that this upcoming season is so difficult to predict, as the times of buying one’s way to a championship is essentially over. Instead, teams will need to direct funds toward talent development within their systems if they wish to compete.

But will the effect on competitive balance truly be positive? The answer is yes, but a very qualified yes. See why after the jump.

In the short run, there is no doubt this trend will help improve on-field parity. Teams evidently no longer feel compelled to trade their stars prior to their entering free agency, and similarly, big market teams simply won’t be able to buy up talent on the free agent market. But in the long run, the answer is not so clear-cut. The ultimate irony of free agency is that it has incidentally served as a great equalizer between small and large market teams. And the pattern of securing young players early in their careers threatens the balancing function of free agency.

Because players are not eligible for free agency until they have amassed at least six years of service, players generally do not reach the open market until their late 20s. At this point, most them have reached or passed their primes, rendering long-term contracts to free agents generally unfavorable for teams, particularly at the tail end of a deal. When you think long-term free agent contract, it’s much easier to come up with a bad one (Alex Rodriguez, Vernon Wells, Alfonso Soriano) than a good one (I can’t think of any). Free agency, therefore, has offered an easy out for small-market teams. They can let their soon-to-be-aging-stars walk, while saving face to their fans by blaming the rich. Then, they can funnel the cash that they would have wasted years down the road toward retooling their farm systems. Now, however, small market teams will remain on the hook for their star players even once they have passed their primes. Undoubtedly, Buster Posey is an excellent player. But $18.5 million for a 35-year old catcher in 2022? Probably not ideal. The Giants, of course, are a relatively large-market team and can probably absorb that cost. If Posey can go on and consistently perform at the level he is clearly capable, and wins the Giants a few more World Series on the way, no one in San Francisco will complain. But consider the Joey Votto deal ($251.5m/12years), in which the small-market Reds will owe him $21 million in 2023, when he is 40 years old. Sounds like an impending disaster.

Small market teams are trying to beat the free agent system that has stolen their talent since its inception. But this process has largely been a blessing in disguise, and these teams are now killing the very game that has allowed them to compete in recent years.