Tuesday, January 2, 2007

The Matsuzaka Auction

Major League Baseball has an arrangement with Japanese baseball teams to make it possible for Japanese players under contract with Japanese teams to play in the US before they become free agents. MLB teams bid on the right to exclusive bargaining with the player. The high bidder has 30 days to negotiate with the player. If a deal is made, the MLB team sends the Japanese team the amount bid - otherwise, nothing changes hands. This system is ridiculous for many reasons.

First, the obvious incentive for any team is to bid an arbitrarily large amount and then not sign the player, thereby blocking his playing for a rival. However, this does not happen in real life - I'd guess it's because there are unofficial and more secretive agreements between teams to make sure it doesn't happen.

The less obvious result of this system is that the Japanese player gets totally screwed. Let's imagine, as seems to be reasonable, that Scott Boras, the agent who consistently gets unbelievably lucrative contracts for his athletes, is able to recoup all of the surplus in any bilateral bargaining situation. The player is of value X to the MLB team bidding for him, the bid is of amount Y, and the player requires at least W to be willing to play in the US. Knowing that Scott Boras will get X-Y for the player, the team will bid Y=X-W. The team that values the player the most will indeed get him, but the player is always driven to his indifference point while the Japanese team rakes in all of the surplus.

Above, it's crucial that Scott Boras get all of the surplus in negotiation. I haven't worked this out, but I think it might be the case that a less effective agent might get his player more surplus because, with the prospect of gaining surplus, teams will shade bids like in a normal first-price auction. Is that right?

1 comment:

Tim said...

I'm not sure how it would work out with a less effective agent.

One key here is that (I think) Matsuzaka was still under contract in Japan. In essence, that would make his unrealized surplus the fee he pays to get out of that contract.

You could probably get your answers about the effect of agent's effectiveness by looking at the soccer transfer market, as I think it's a fairly analogous situation, with a lot more data points.