RETHINKING RESTRICTIONS ON PLAYER MOBILITY IN MAJOR LEAGUE BASEBALL

JOEL G. MAXCY (*) I. INTRODUCTION The filthy rich (owners) share an unlikely alliance with the proletariat--the players' union--which remains absolutist in its position that no limits should be placed on a player's right to remuneration and residence-even if this threatens the very essence of sport. (1) --Frank Deford Major League Baseball (MLB) has long imposed institutional rules that distort a free labor market outcome for players' services. The primary market restraints can be classified as player mobility restrictions. Most noteworthy are a contractual reserve clause that prohibits players from negotiating contracts for their services with any league member except their current club (employer) and a draft that determines an amateur player's initial professional contract assignment. Until 1976 the reserve clause was mandated in all MLB player contracts. A labor arbitrator's ruling following the 1975 season left questionable the legality of the reserve clause and ushered in the era of free agency. (2) The ruling initiated negotiations toward a new collective bargaining agreement (the Basic Agreement in MLB parlance) between MLB and the players' labor union (Major League Baseball Players Association, MLBPA). The basic agreement was in place for the 1977 season and continues to allow players with six or more years of MLB service to become free agents and negotiate with other clubs at the expiration of their current contracts. The amateur draft was instituted in 1965 and permits a prospective professional player to negotiate his initial contract only with the club that selects him. Free agency and the draft both represent a reassignment of property rights to the players' labor services. A free labor market grants the players the property rights to their services, whereas both the reserve clause and the amateur draft assign the property right to the clubs. (3) Theoretically the alternate assignment of property rights does not affect the distribution of talent across MLB clubs but will reallocate economic rents toward the party holding the property right. The specific application to MLB of this invariance principle is credited to Rottenberg (1956) and it is representative of the principles of the Coase (1960) theorem. The actual effects of the two described institutional changes have been addressed in a number of prior studies. It is argued here that the evaluation remains incomplete because the possibility of altered transactions costs and asymmetric income effects have not been considered. Mobility restrictions have long been justified as necessary for the maintenance of competitive balance across MLB teams, which in turn has been argued as necessary to maintain an economically viable product. The 1990s have seen MLB's revenue base grow considerably. In fact, since 1995 MLB total revenues have more than doubled while payrolls have increased by about 60%. (4) Expansion to four additional cities, the construction of a number of state-of-the-art stadiums, and a significant increase in the value of television broadcast rights are responsible for most of this growth. Coinciding with the escalation of player salaries is the perception and claim of a growing disparity in team payrolls (Levin et al., 2000). This has brought much concern to sportswriters, fans, and other observers. Despite the accelerated revenue growth, many believe the sport faces an uncertain economic future. Popular wisdom suggests that free agency is the root of the sport's alleged economic problems. The gap between the wealthy and poor teams, as reflected by payroll comparisons, is expected to have an adverse effect on the distribution of player talent and competitive balance. Overbidding for free agents (so goes the thinking) will continue to escalate salaries and drive teams to financial ruin. Most believe that high-revenue teams dominate the free agent market and the distribution of talent has become more skewed in their favor as a result. …