NEGOTIATED SETTLEMENT UNDER MLB FINAL-OFFER SALARY ARBITRATION SYSTEM

This paper provides a detailed analysis of negotiated salaries under Major League Baseball's final-offer arbitration process using data from the 2007-2010 seasons. There is a wage premium of 25% for hitters and 14% for pitchers filing for arbitration. Interestingly, there is an additional premium for exchanging offers for hitters but not for pitchers. The additional premium in salary for hitters who exchange offers with their clubs amounts to 7%. (JEL J3 1, J52) I. INTRODUCTION In negotiated settlements, the costs of reaching an agreement can be expensive in terms of both time and money. If both sides could realize the objective, unbiased, end result from the beginning, then an accord could be reached quickly. This is rarely the case. In industrial relations, the use of mediators and arbitrators is designed to assist union and management negotiators in reaching a contract settlement. The use of mandatory interest arbitration to resolve bargaining disputes is found predominantly in the public sector; this is designed to reduce the negotiation costs to taxpayers. Unable to reach a settlement, unionized police, firefighters, teachers, and the respective governing bodies in charge of the budgets of these employee groups are often forced to allow a neutral, third party to decide the major fiscal contents of their new collective bargaining agreements (CBAs). In rare cases such as in New Jersey, the wages of police and firefighters are determined by final-offer arbitration, a system in which the arbitrator is constrained to choose either the offer proposed by the union or the offer proposed by the management. Final-offer arbitration was designed to reduce the use of expensive arbitration as, in theory, the requirement that the arbitrator must accept the final offer of one side or the other would push both sides closer together and allow for a negotiated settlement. Major League Baseball (MLB) has used a system of final-offer salary arbitration (FOSA) since 1973 to determine the salaries of players of a certain experience level. Baseball's FOSA process was thought to provide a "laboratory experiment" that would provide greater insight into the workings of such a system of interest arbitration because of the level of data available for analysis. The historical record of these cases has been studied extensively by economists to analyze topics such as the determinants of arbitrators' decisions, the determinants of the probability that the dispute will end in arbitration, and the effect of each party's willingness to bear risk on the salary outcome. Much of the previous research into baseball's final-offer system has centered on the final offers themselves and the arbitrators' decisions. However, under baseball's system, a negotiated salary agreement can come at any point before the arbitration panel renders a decision. This paper uses data from the 2007 through 2010 seasons and analyzes negotiated salaries under three out of the four separate stages of the FOSA system: those who are eligible for arbitration and do not file for it; those who file for arbitration and do not exchange salaries; and those who exchange salaries and do not reach the arbitration stage of the process. Specifically, the analysis provides estimates of the average treatment effect for players moving to each subsequent, aforementioned stage in the bargaining process. No other studies of the FOSA process in MLB have examined the effects of filing for arbitration on the salaries for players. Other published studies have used the list of players who filed for arbitration as their dataset. This ignores the first step in the baseball arbitration process.' Burgess and Marburger (1993) concluded that arbitration awards won by players were higher and those won by owners were lower than negotiated settlements for comparable players. Miller (2000b) found that negotiated salaries that occurred after the exchange of final offers under arbitration were significantly different from those for free agents, while Marburger (2004) found that the average free agent salary was a significant determinant of both player and management final offers. …