Why Masahiro Tanaka’s Yankees Contract Is Good for Baseball

(Photo: Reading Tom)

(Photo: Reading Tom)

A few days ago, the New York Yankees signed Masahiro Tanaka to a $155 million contract. As Bryan Hoch of MLB.com notes, this is the fifth-highest salary for a pitcher in Major League history.  But the Tanaka contract is different from the top four on the list.  The top four contracts went to pitchers who were already playing Major League Baseball.  Tanaka played last season for the Rakuten Golden Eagles in Japan’s Nippon Professional Baseball league.  And while his 24-0 record – and 1.27 ERA – helped the Golden Eagles win the Japan Series title, we do not know how he will fare against MLB hitters. Despite this uncertainty, there is still a sense that this signing illustrates that the Yankees have an unfair advantage.

ESPN’s Tim Kurkjian was quoted by Sports Business Daily with the following observations:

  • The Tanaka signing is the latest evidence that the “gap between the haves and the have-nots is getting bigger.”
  • MLB and the MLBPA “need to have another serious discussion about what they’re going to do about this.”

To summarize, Kurkjian is expressing the sentiment that when teams like the Yankees spend much more than anyone else on talent, this is bad for baseball.  Although Kurkjian’s argument is often expressed, I am going to note that the academic study of competitive balance in sport (and yes, economists do look at this issue) suggests the Tanaka signing is quite good for competitive balance in baseball.

To see this, let’s be clear that what Kurkjian argues has a very long history.  Back in 1879 (yes, 1879), the following statement was released by the National League. 

 “The financial results of the past season prove that salaries must come down. We believe that players insisting on exorbitant prices are injuring their own interests by forcing out of existence clubs which cannot be run and pay large salaries except at a personal loss” [1]

So baseball people have thought large salaries are a threat for more than 130 years.  Despite this sentiment, Major League Baseball – unlike the NBA, NFL, and NHL – does not have a salary cap.  Consequently, baseball – relative to these other sports – has substantially more disparity in payroll.  In sum, there does appear to be a difference in baseball between the “haves” and “have-nots.”

At least, that is the payroll story.  Payroll disparity, though, isn’t really the issue from the perspective of the fans.  What really matters is disparity on the field. And on that count, baseball – relative to other sports – doesn’t really have a problem.

To see this, let’s turn to a measure many economists use to capture competitive balance. About 25 years ago, economists Roger Noll and Gerald Scully independently argued that a league’s balance could be measured by comparing the standard deviation of a league’s winning percentage to the standard deviation that would exist if a league was ideally balanced.  Across the past ten years, here is what the Noll-Scully ratio looks like for the four major sports leagues:

League

Season

Average Noll-Scully

Competitive Balance

Measure

National Hockey League

2002-03 to 2012-13

1.39

National Football League

2003 to 2012

1.58

National League

2003 to 2013

1.71

American League

2003 to 2013

1.86

National Basketball Association

2003-04 to 2012-13

2.78

As one can see, the NBA is the least competitive sports league.  Given that only eight teams have won an NBA title in the past 30 years, this is probably not a surprising result.

What may be surprising is that baseball once looked like the NBA today.  From 1901 to 1946, the average Noll-Scully ratio in the American League was 2.54. In the National League, the ratio was 2.57.

These numbers tell us that baseball – relative to what we see today – was once competitively imbalanced.  This started to change in 1947 — that season Jackie Robinson began to play Major League Baseball. The racial integration of baseball expanded the talent pool beyond the white Americans baseball employed through much of its history.  Soon, baseball began to employ talent regardless of race or nationality.

This expansion in the talent base improved competitive balance in baseball.  To understand why, consider the argument evolutionary biologist Stephen Jay Gould made back in the 1980s.  Gould argued that there is a normal distribution of talent in the population (i.e. average is the most common level of talent, with small numbers that are well below average and well above average).  But the very best talent runs into the limits of the human body.  Consequently, Gould argued that there is very little difference in the very best players.

When the population base is small – as it was in baseball in the first half of the 20th century – the population of “very best players” is quite small. Consequently, teams filled out their rosters with players that were not really very good.   And when great players play the not-so-great, the outcome is quite certain and the league doesn’t have much balance.

But when a league draws from a bigger population base, the population of “very best players” gets much bigger.  Suddenly every team has great players.  And just as suddenly, the league is much more balanced.

That is what has happened in baseball across the past several decades. 

This is also why the signing of Tanaka is good for Major League Baseball.  This can be made clear when we think about what this does for Japanese baseball.  Consider the following from ESPN.com:

Tanaka’s windfall, on top of Darvish’s deal and subsequent success with the Rangers, is likely to be a clarion call to the next Japanese pitching ace with dollar signs in his eyes and dreams of coming to America. But MLB still needs to walk a fine line between keeping the door open for prime Japanese talent and not making the move to the U.S. so enticing that it raids Nippon Baseball rosters and cripples the Japanese game. As long as somebody is getting the money, the talent flow is going to continue to some degree.

“If the posting fees become too high, then you’re going to have Japanese clubs selling these guys after 2-3 years,” said one baseball official who’s familiar with the process. “They’re in the business of running a baseball league — not running a player auction. If every young star player was posted and a club could get $30-50 million, some Japanese clubs would be in the position of selling players rather than trying to put together a competitive team.”

In sum, losing talent to another league tends to worsen competitive balance.  And likewise, expanding your talent base makes it better.

Of course, all of this might still leave you thinking that the Yankees buying a winner is bad for baseball.  Perhaps the following might make you feel better:  Variation in payroll in baseball explains less than 20 percent of the variation in winning percentage. One reason why spending doesn’t match outcomes is that forecasting the future in baseball is difficult. We can look at the stats and know who was “good” or “bad” in the past, but the future – especially for pitchers – is hard to predict.  Consequently, it is hard for the richest teams to simply spend money and win. 

So if you don’t like the Yankees (and I share this sentiment), do not despair.  The Yankees cannot simply buy a title.  But if the money in Major League Baseball can get more great players to come to the North America, then that is good for the game. At least, the game in North America.


[1]This quote appeared in Eckard, E. Woodrow [(2001). “The Origin of the Reserve Clause: Owner Collusion Versus ‘Public Interest.’” Journal of Sports Economics, 2, no. 2 (May), p. 118].  It originally appeared in Sullivan, D. A. (Ed.). (1995). Early innings: A documentary history of baseball, 1825-1908. Lincoln: University of Nebraska Press.

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  1. Ken George says:

    You and Jayson Stark can throw out all the saberstatistics you want. Bottom line is that NYY, Boston, LAD and other rich teams are always in the equation because they can buy more talent, while KC, Cleveland, Colorado and Houston have to be perfect to compete – and that imbalance attracts more quality players to big-market teams. Different teams may win the World Series, but some teams are always in the mix and others are always eliminated in August. Teams like St. Louis win in spite of disadvantages; teams like the Yankees have a better chance to win because of them.

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  2. Allan says:

    This post doesn’t acknowledge that a great player in basketball can play quite a bit more than a bad one whereas in baseball, each player’s contribution is limited to a set role, limiting the effect of one great player on a team.

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  3. The White says:

    “Consequently, it is hard for the richest teams to simply spend money and win.” — it couldn’t be more so… and as Allan said (here in the comments), other sports do have the “money can buy championships,” issue; basketball, a sport where pairing one or two players on a team can change the outcome of success for other teams for the next decade, is just one example.

    However, one thing to keep in mind: What the public/sports fans call winning is not necessarily the same thing as what the owners think of winning… So what if the Yankees don’t go to the World Series or even close to it, they will still sell out all of their season tickets and they will be “winning” if they sell out the stadium close to every time this new pitcher from Japan pitches.

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  4. bob says:

    The Yankees cannot buy a given title, but their money can certainly get them part of the way there, especially when they have the money to yank hot young talent away from the teams that draft them and are unwilling to pay large salaries once those players reach free agency.

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  5. Juan A Zambrano says:

    Soccer definitely shows both these trends. The top European teams get the best players from all over the world and consequently the UEFA Champions League has the best and most competitive games.
    The down side is in the rest of the world where professional teams have become feeder to European teams and consequently the sport has deteriorated. If all the good players go to Europe why follow local leagues?
    But all in all the sport is at its best. Concentrated in the wealthy European leagues, but a thrill to watch.

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    • Mike B says:

      Hidden due to low comment rating. Click here to see.

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  6. Alaska Pete says:

    Sure it is good for the game in North America to bring in more talent. But you’ll have a hard time convincing me that the payroll disparity that the signing stems from is good for the game. The Yankees have been talking for 2 years or more about how they would be under the luxury tax in 2014, it wasn’t an option, etc etc. So much for that. Yes as you write above, payroll disparity doesn’t mean the rich teams ALWAYS win, because baseball performance is extremely hard to predict. This is why the A’s and Rays are so fun to root for, they are beating the system. However, how would you feel if I invited you to a contest where we both enter a Vegas casino and whoever leaves with the most $$ wins, and I get 3 times as much money to start with? Even if the underdog still wins sometimes, this sort of blatent unfairness makes a sport less fun and frankly less interesting. No one wants to watch high school basketball teams playing junior highers, because disparity makes for boring competition. Imagine how much more fun it would be, how much more invested the small-market fans would be, if that ratio quoted above was at 1.0? MLB could address this by increasing the luxury tax and instituting a payroll minimum, both of which the mlbpa will fight tooth and nail of course. And maybe reforming the draft to give greater reward to the worst teams somehow.

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    • Mike B says:

      The other way to look at it is that you have a clearly defined way to increase your odds of winning. In leagues with “parity” like the NFL you might as well be playing a roulette wheel. I contend that it is better to be in a league where one can buy a championship because every team has a clear path to winning a championship. You get an owner who is willing to write the check and there you go. In the NFL no matter how hard some teams try they will never win a championship because the game has been made too even.

      It is better to have goods available at a high price than no price at all.

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      • Eric R says:

        “You get an owner who is willing to write the check and there you go.”

        Not quite that simple. When the Steinbrenners write a $230M check, they also see $100M+ in profit. If Lewis Wolff wrote the same $230M check to try and “buy a championship”, he’d end up losing $100M+

        If the Steinbrenners would be flat-out broke after five years of spending the way they do, would they still do it for the glory of winning championships, or do they do it because they can while still making a ton of dough?

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  7. RGJ says:

    So much wrong with this I have to go get a glass of wine before I start.

    The National League, really the only thing that could be called a major league at that point, in 1879 was comprised of eight teams, with a roster size of about 16-17. It wasn’t until 1892 that a roster limit of 13 was instituted. Leagues and franchises came, went, crashed like a traveling circus for one reason — money.

    So in 1879 there were about 112less than 90 professional players at any one time, lets say 100. Today there are 800 active at any time, and that’s if you choose to disregard the minor or balance them out with the lesser leagues of early baseball that rose and fell. That’s 800 players.

    US Population in the 1880 Census was 50 million. Today it is 317. That is a little more than six times 1880, almost exactly the proportion of major league baseball players.

    More importantly, there was no thing as a farm system until Branch Rickey in the 1920s, and some teams had no farm system until after WW11. Players were discovered word of mouth playing for town teams or industrial leagues.

    And most importantly, the early years did not put as much emphasis on physical prowess. Home runs were more rare than triples nowadays, and an emphasis was put of defense and bunting that necessitated more knowledge than athletiscm.

    The guru of baseball analysts, Bill James, has written at length on this, the fact that groth of baseball talent has been proportional to the growth of US pop[ulation.

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    • Tatsuwashi says:

      If the growth of talent has been proportional to the growth of US population, how does that jive with rise of international players in the ranks? 28% or so of players are not American.

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      • Voice of Reason says:

        No, the growth have talent also has to do with kids growing up knowing that if they make it big they can sign a $100,000,000 contract, and not just play in front of 500 fans and have a winter job to support themselves.

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  8. Charles says:

    Having just watched a very boring SuperBowl with perhaps the best “technical” quarterback ever to play the game having his ass handed to him, I am not sure that having the “best” players leads to the “best” games. There is, I think, a point of diminishing returns! And I think owners could harvest greater profits if they understood this more fully.

    They should hire Mr. Levitt to study this question: How can we put more mediocrity, and more fun, back into our games?

    The college football season was decided in a dramatic comeback with 13 seconds left on the clock. The whole season was like that. 98 percent of those players are not in the Stephen Jay Gould category of elite human specimens; 98 percent will never play pro football at all.

    March Madness is upon us, which will entertain so many Americans with a basketball tournament featuring TEAMS we’ve never heard of, let alone the players!

    High school sports fields equally compelling games — ask anyone in Texas on a Friday night.

    The point: There is great fun and profit to be harvested from competition at the sub-elite level, and building pro leagues around the marginally elite superhuman athletes may not be the best way to optimize fun, nor profits!

    In smaller cities minor league sports thrive with players who are many notches below the Stephen Jay Gould threshold of top elites; but the games are fantastic, the prices reasonable, and the fans rabid.

    Maybe NBL/NBA/NFL owners should commission Mr. Levitt to study this “diminishing returns” phenomenon to establish a structure that optimizes talent vs. the family sports experience in order to extract maximum “profit” (money for owners, fun for fans) for all, fielding players at the level of talent that meets, but does not exceed, the point of diminishing return.

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    • Voice of Reason says:

      Thank you! Why does everybody assume that we need to keep pumping more money and changing the rules away to put superhumans on the field? While I don’t want a bunch of scrubs on the field, I’d rather have 30 teams that were about as good as the 20th best team is now but were about the same level of quality than teams who just play so that the best can beat down on them. If you want your home team to have a guaranteed happy ending, watch a Disney movie.

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