The Weekly Rant: The Mixed Incentives of MLB's International Spending Limits

During the last CBA negotiations, MLB owners had to find areas in which they could restrain spending.  The league's ever-increasing revenues were directed not only into free agent salaries, but also into bonuses for amateur players from both North America and around the world.

While the Players Association resisted changes that would limit big league salaries (excepting the disastrous Qualifying Offer/Draft Pick Compensation scheme), they were certainly willing to budge on amateur spending.  Spending in the First-Year Player Draft (in which amateurs from the United States, Canada, and Puerto Rico participate) had increased dramatically as teams recognized the value in acquiring cost-controllable, young talent.

Similarly, amateurs from the rest of the world (mostly Latin America and Asia) saw their signing bonuses grow richer and richer in an unrestrained market place.  International amateurs could negotiate with any team, meaning they could receive more than equally talented U.S. players, who could only negotiate with the team that drafted them.

A "hard-slotting" system was agreed upon for the draft, which significantly limited what teams could spend on each pick (and the draft as a whole).  The new rules were a significant achievement for Major League Baseball, in that the spending pattern was not only stunted, but reversed.  Harsh penalties, including loss of future high-round draft picks as well as 100% taxes on overspending, have been effective as disincentives; draft spending decreased by over 11% the year after the new rules went into effect.

The clubs weren't as successful in crafting a new policy for international spending.  Many felt that an international draft would be the next logical step to contain spending and also to allocate talent more equitably across the league.  But a laundry list of possible difficulties caused the two sides to table the idea until after the CBA was negotiated*.

*In fact, an international draft may be a long ways off.  Sources I've talked to have said that neither side is really that unhappy with the current arrangement, and it may be more trouble than it's worth to implement a full international draft.

Instead, teams have "bonus pools" for international spending, just as they do in the draft. Players are still free to negotiate with all 30 teams, but some teams have more bonus pool money available (the amounts are determined using reverse-order standings of the previous season). In theory, this system should work just as effectively as hard-slotting in the draft.  But in reality, spending did not decrease, and may actually increase in coming seasons.

Unlike in the draft, the penalties for overspending are just not harsh enough in the international market.  Teams do face escalating taxes on overspending, along with reductions on spending during the next year.  But these disincentives did not deter the Cubs or Rangers from spending millions more than their allotted bonus poll during the most recent signing period.

While those two teams spent more than $8 MM each, the Yankees are prepared to make a mockery of the system.  Some reports estimate the New York club will spend upwards of $18 MM on prospects, which would result in over $12 MM in penalties.  They would be very restricted in the next season's international class, but there is just too much incentive to break the rules.

The return on investment for amateur talent by all lines of thinking is really quite high. Landing just one star player can result in tens of millions of surplus value during pre-arbitration and arbitration seasons. And while money isn't everything in scouting and signing top prospects, it certainly helps.  Some teams obviously feel that there is more to be gained by spending a great deal in one season to land a bunch of top prospects (and basically sitting it out the next year), than by signing one or two highly touted players each July 2.

This will be a perfect storm once the Yankees really get involved.  First, there are the diminishing marginal costs (once you go over by a little bit, it makes sense to go over by a lot).  Then you have a team that has seen its spending in other areas slowed by tougher penalties. The competitive balance tax curtails the free agent market. Hard-slotting restricts draft spending.  The Yankees are severely limited on ways they can spend money efficiently.

Additionally, the Yankees have struggled to add impact talent through the draft (as a result of both their later draft positions and general under-performance in scouting, signing, and developing talent).  It's easy to see why they are prepared to go crazy on this coming year's crop of international amateurs.

Obviously this isn't what Bud Selig envisioned when the new system was drawn up; big market teams like the Cubs, Rangers, and Yankees buying up the top rated prospects from around the world while small market teams fight for the scraps.  One way to change this would be through the previously discussed international draft.

In absence of that possibility, harsher restrictions are needed.  More severe taxes would be the easiest and least intrusive penalty to implement. I would favor more severe and effective disincentives, such as the loss of draft picks for anything worse than minor overspending.  That penalty has worked thus far for hard-slotting, and I think it could be employed similarly in the international market.


Feature Image courtesy of MLB.com.