Friday, November 17, 2006

Correct one, but not the other 

Most of my friends know I'm nuts about baseball and about sabermetrics. My morning internet tour almost always includes Baseball Prospectus. But when I read Joe Sheehan talking about the Red Sox pursuit of Daisuke Matsuzaka, I was a little disappointed.

Next paragraph is background for those unfamiliar, you can skip if you know the story:
Matsuzaka is a pitcher with the Seibu Lions in the Japan League. He currently makes about $3 million a year as arguably the best pitcher in the JL. He is still bound by contract to Seibu for the next two seasons, but Japanese teams can offer their players to the US major leagues by posting them to Major League Baseball. Each team makes a sealed bid; the highest bid grants the team the exclusive right to negotiate for thirty days with the player on a contract. If the team and player fail to negotiate a contract, the player returns to Japan.

The Red Sox -- my team -- won the bidding on Matsuzaka for the princely sum of $51.1 million, and are now negotiating. Sheehan is trying to figure out how much the contract between Boston and Matsuzaka will be:
Matsuzaka is exactly what the Sox need, a top-of-the-rotation starter. If the $51 million is treated as a sunk cost, which it should be, the Sox should evaluate Matsuzaka as roughly equivalent to Roy Oswalt, who signed with the Astros for five years and $73 million. (Note: Many, many people have pointed out that this is wrong, because the money has not yet been paid, and will not be paid in the event the Sox do not sign Matsuzaka. I was trying to make the point that the posting fee is disconnected, from Matsuzaka's standpoint, from his negotiations. "Sunk cost" was the wrong term to use. My apologies, and my thanks for the feedback.--JSS)
I hate to tell you this, Joe, but you still missed the point. What the Red Sox bought is the right to be part of a bilateral monopoly. Matsuzaka has an opportunity cost of $3 million, the amount he could make in Japan ... plus the opportunity to come out again next year for posting, or wait two years and be an unrestricted free agent (in which case he has everyone bidding, and can get closer to a monopoly price.) That defines his reservation price, the wage below which he will decline the offer and return to Japan. The Red Sox will pay no more than the value of his marginal product in creating revenues for the team by helping them win another World Series. ("Another" -- that still feels good, man!) What Sheehan continues to offer in terms of comparable wages are close to monopoly wages, by focusing on the salaries given to free agents. Matsuzaka is not getting that wage from the Red Sox because he cannot get any other MLB teams to bid on his services.

Sheehan is right that the presence of an agent for Matsuzaka makes it more likely that the player and team will come to an agreement. But perversely, that is to the benefit of the team, not the player; it is analogous to the real estate agent story that Levitt and Dubner tell in Freakonomics (here's a version of it from Wired last year.) Understanding those incentives may be one reason why the Red Sox paid such a high price just to sit and visit with a 26-year-old pitcher.