Contract Length and the Return to Performance in Major League Baseball

Abstract

This article focuses on the relationship between contract length and compensation in Major League Baseball. Because the best players receive both the highest salaries and the longest contracts, wage regressions that omit length can lead to misleading inferences. Although contract duration is positively related with salaries, the authors find evidence of a negative relationship between contract length and a player’s return to performance. These results indicate some type of trade-off going on in the negotiation process that has not been identified in the previous literature on compensating wage differentials.