Batting Leadoff: Extensions As A Market Efficiency

This post originally appeared on Batting Leadoff. Batting Leadoff is a website dedicated to providing readers with premium baseball content. Posts from the site will appear regularly on the Sports Business Society Blog (view the information in the sidebar for updated information).

We all know that teams are loaded with cash right now. Thanks to a large and steady stream of revenue due to new TV deals, teams have been ready to spend big at free agency. That was obvious this offseason: Robinson Cano, Shin-Soo Choo, Jacoby Ellsbury, and Brian McCann can all call themselves very rich men after their contracts were inked. But not all teams can afford that kind of commitment, and even teams that can, can’t make that the order of the day.

The two teams that are shining examples of this are the Atlanta Braves and Los Angeles Dodgers. The Braves are stuck with a horrid TV deal and poor stadium (that they are leaving), and the Dodgers are the opposite; they’re rolling in dough and are willing to pay a premium for any quality player out there. Despite their financial differences, both have decided to utilize contract extensions as a key feature of their payroll allocation.

They together have extended Julio Teheran, Freddie Freeman, Craig Kimbrel, and Clayton Kershaw, and have locked up their stars for quite a number of years. But how much did they save as opposed to market value and arbitration? Let’s take a look.

To examine this, we’ll look at some basic projections for these players against what market value and projected arbitration salaries would be. For argument’s sake, I’ll use the player’s projected arbitration salary as the projected salary for 2014, and approximately then using an approximate 40/60/80 rule (thanks for the tip, Max Fogle) to figure out an estimate of their salaries going forward.

Those are the hardest to estimate because of inflation and the fact that this rule isn’t perfect in estimation, but I just made an estimation using that rule and my only interpretation of their value. And for free agency, I’ll assume that the market value is $5.5 million per WAR with a 5% inflation rate each year.

Clayton Kershaw:

Year	Projected WAR	Arbitration/Market Value (in millions)	Actual Salary (in millions)
2014	5.8	$18.25	$4
2015	5.8	$33.5	$30
2016	5.3	$32.1	$32
2017	5.3	$33.7	$33
2018	5.3	$35.4	$33
Total	27.5	$152.95	$132

Amount of money saved: $20.95 million, worth about 3.13 WAR in 2018.

Freddie Freeman:

Year	Projected WAR	Arbitration/Market Value (in millions)	Actual Salary (in millions)
2014	4.5	$4.9	$5.1
2015	4.5	$8	$8.5
2016	5.0	$11	$12
2017	5.0	$33.4	$17
2018	5.0	$35.1	$21
2019	4.5	$33.1	$21
2020	4.0	$30.9	$22
2021	3.5	$28.4	$22
Total	36	$184.8	$135

Amount of money saved: $49.8 million, worth about 6.15 WAR in 2021.

Julio Teheran:

Year	Projected WAR	Arbitration/Market Value (in millions)	Actual Salary (in millions)
2014	3.0	$.49	$0.8
2015	3.5	$.49	$1
2016	4.0	$4.6	$5.3
2017	4.5	$6.9	$6.3
2018	4.5	$9.2	$8
2019	4.5	$33.2	$11
Total	24	$54.9	32.4

Amount of money saved: $22.5 mil, worth about 2.2 WAR in 2019.

Craig Kimbrel:

Year	Projected WAR	Arbitration/Market Value (in millions)	Actual Salary (in millions)
2014	2.0	$7.3	$7
2015	2.0	$8.5	$9
2016	2.0	$10.5	$11
2017	2.0	$13.4	$13
Total	8	$39.7	$42

Amount of money saved: -$2.3 mil, worth about 0.36 WAR in 2017

As you can see… the Dodgers and Braves will save a lot of money, unless a tragedy were to strike one of these players. My projections are pretty simplistic–just based off of the basic aging curve and estimations of arbitration–but they make a valid point. Free agency is expensive, and teams should not always have to resort to that, especially when it’s their own player.

Teams have the ability to have sole bargaining rights and players often are forced to take a “hometown discount” because–who knows if they’ll still be good by the time they hit free agency! Teams also will save the most money with starting pitchers and position players–it’s much harder to bargain down an excellent reliever. And granted, I split projections on Kimbrel due to the unpredictability of relievers, so although it is a loss, it will more likely be closer to a split-even.

It’s pretty obvious what the conclusion is. Teams are able to structure extensions in such a manner that they can: still pay the same amount during arbitration, avoid a bidding war for their prized players, and likely underpay what will be the market value by that current year. They then can take that extra capital and reinvest it into other areas of the team. It’s all part of how a team can diversify the ways in which they invest in their own team; extensions can be a nice middle ground between the draft and free agency.

Teams like the Dodgers who can afford big contracts can still avoid them, and teams that can’t afford free agency can find a way to provide some stability and retain their homegrown talent–it’s no wonder the Braves have been so good for so long. I fully expect teams to continue to implement this strategy, especially with players of elite quality.

Matthew Provenzano is a sophomore at Cornell University. Matthew is a featured blogger at Batting Leadoff, a contributor for PinstripeAlley.com, and covers Cornell Baseball for Cornell At Bat. Contact Matt at mjp294@cornell.edu or follow him on twitter at @mpro6294.

This post originally appeared on Batting Leadoff. Batting Leadoff is a website dedicated to providing readers with premium baseball content. Posts from the site will appear regularly on the Sports Business Society Blog (view the information in the sidebar for updated information).