Modeling Arbitration Contracts: Introduction

     In  Major League Baseball, young players are subject to salary arbitration if the player and his club cannot agree to terms of a contract. Players are eligible if they have at least three years of service time and less than six years of service time. Those players who rank in the top 22% of service time among those with between two and three years of service time are also eligible for salary arbitration and are deemed ‘Super Two’ players. When a player is eligible for salary arbitration, there are 4 outcomes that may occur: (1) the club does not tender the player a contract, effectively making the player a free agent, (2) the club and the and the player agree to a multiyear contract, (3) the club and the player agree on a one-year contract, and (4) the club and the player both submit salary requests to an arbitration panel who then determines which salary request, either the club’s or the player’s, will be awarded to the player as his salary for the next baseball season.

   In the eight seasons between 2012 and 2019 there were a total of 1,484 instances of players eligible for salary arbitration according to the MLB Trade Rumors Arbitration Tracker. This number does not include players who were eligible for salary arbitration with more than six years of service time in 2012 under the previous Collective Bargaining Agreement, nor does it include players who were not tendered a contract by their club, effectively releasing said player.  89 of the 1,484 players signed multiyear contracts with their club, 1,320 players agreed to a one-year contract with their club prior to an arbitration hearing, and 69 players took their case to the arbitration panel. Of the cases that made it to the arbitration panel, 33 players had their requested salary selected and 36 clubs had their requested salary selected.

    The salary arbitration criteria, as specified by the Collective Bargaining Agreement between Major League Baseball and the Major League Baseball Players Association, include the player’s contributions during the past season (including overall performance, leadership, and public appeal), the length and consistency of his career contribution, and the record of the player’s past compensation. Other qualities that are considered but are difficult to quantify are the existence of any physical or mental defects, and the player’s impact on the performance of the club in both attendance and League standing. Only publicly available statistics are to be used in the hearing, which usually takes the form of ‘traditional’ statistics such as home runs (HR), runs batted in (RBI), earned run average (ERA), wins (W) and saves (SV).  The subsequent analysis will be limited to the player’s salary for the previous season, the player’s previous year statistics, and the count of awards that a player has won, including, but not limited to, MVP awards, Cy Young awards, and All-Star game starts.

     The analysis conducted will model the salary for players who were tendered offers and did not sign multiyear contracts, as outlined in outcomes (3) and (4) above. Likewise, models will be created to predict both the club and player’s initial requests with the intent of finding the optimal proposal of both the club and the player. The analysis will be conducted separately for batters and pitchers due to the separate nature of each group of player’s statistics.