From: jpalmer@uwovax.uwo.ca (The Econoclast)
Subject: What is $43.75m worth?
Organization: University of Western Ont, London
Date: Tue, 15 Dec 1992 19:40:24 GMT

	Last week I read that even though Barry Bonds is to receive
$43.75m over six years, most of it comes in the later years of his
contract. He is to receive:

1992 (signing bonus)	2.5
1993			4.0
1994			4.75
1995			7.75
1996			8.0
1997			8.25
1998			8.5

There are other conditions and clauses, but I cannot imagine that
anyone really believes that this structure of income payments comes
close to reflecting the EXPECTED productivity of a 28-year-old
baseball star. 

	In fact, the Giants are undercompensating Bonds for the next
two years, and maybe overcompensating him in the more distant future. 

	Given the recent Joe Carter contract, it is not 
unrealistic to suppose that the Giants really expect Barry Bonds
to be worth $7.3m each of the next six years (abstracting 
from expected inflation is really difficult, here, since the expected 
economy-wide rate of inflation is probably quite different from the
expected rate of inflation in baseball revenues and players' salaries). 

	If you will grant me this assumption, then the Giants are
saving hundreds of thousands of dollars at the front end of this 
contract. They can invest the difference and have more than 
enough left to pay the larger sums in later years, with some profits
left over. 

	Suppose that the Giants had to set aside the money today to
pay Bonds' salary. Suppose further, for the sake of computational
ease, that he would receive each payment at the end of each year.
Suppose finally, that a 5% interest rate is appropriate for figuring
out how much the Giants would have to set aside for each year's
salary. Here is what the present values would be:

1992 (signing bonus)    2.5		2.5
1993                    4.0		3.81
1994                    4.75		4.31
1995                    7.75		6.69
1996                    8.0		6.58
1997                    8.25		6.46
1998                    8.5		6.34
					_____
				       $36.69


Meanwhile, the present value of an annuity of $7.3/yr for six years at
5% is $37.05, so by loading up the back end of the contract, the Giants
saved about $350k, cet. par. [the economists' hedge]

	Given the Carter signing, I have some bold assertions to make
here. First, unless Bonds gets some non-pecuniary benefits from the
contract and/or from playing with the Giants, he should fire his
agent. This is a really bad deal for Bonds in comparison with Carter's
$20m for 3 years, especially in light of Bonds' clearly superiour
performances and his younger age. 

	The only caveat I acknowledge here is that Bonds' salary is 
guaranteed; i.e. the Giant's bear the risk of his being injured. 
If Bonds opted for a set of two 3-year contracts instead, he 
might be injured during the first three years and lose out on
the second three years of high income. If this is the case, one 
wonders if his agent explained to him how much he might be paying, 
implicitly, for this insurance policy. 

	Similarly, the Giants have opted to assume the risks that
baseball revenues might decline in the future. If they do, Bonds may
be better off with the longer term contract. At the same time, though,
if the rate of inflation goes through the roof over the next 6 years,
Bonds assumes this risk and ends up the big loser.

	Second, why weren't the Blue Jays in the bidding for Bonds. He
specifically insisted that a clause in his contract not allow his
trade to a Canuck team without his approval. I wonder why. Was his
agent completely informed about the tax situation? And if so, why
didn't they require more up-front money the way David Cone did?

-- 
  Regards,

  John Palmer    London, Ontario       Voice: (519) 661-3533     FAX: 661-3666
  reply to jpalmer@uwovax.uwo.ca       The Economics Institute for Journalists
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