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Motivating long-term employment contracts: risk management in major league baseball

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Author Info
Joel Maxcy (Department of Economics, SUNY-Cortland, Cortland, NY 13045, USA)

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Abstract

Long-term employment contracts have typically been modeled as mechanisms whereby workers reduce the risk of lost income with a guaranteed long-term wage that is less than the expected spot wage. Examination of contract length among major league baseball players shows that long-term contracts for marginal players, those for whom it would seem most logical to desire this insurance, are rarely observed. Star players, whose income levels should enable them to purchase this sort of insurance from other sources, represent the majority of long-term contract holders. This paper presents a theoretical model showing that firms, when facing both market uncertainty and uncertainty about an employee's future productivity, have an incentive to reallocate risk with long-term labor contracts. In such cases, a long-term contract may be observed without a risk premium paid by the worker. The labor markets of professional sports represent this combination of market and productive uncertainty. Empirical results from major league baseball using a binary choice probit model, which corrects for sample selection bias, support the hypothesis that factors, which increase market uncertainty and reduce productive uncertainty, are consistent with the observation of long-term contracts. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1112
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 25 (2004)
Issue (Month): 2 ()
Pages: 109-120
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Handle: RePEc:wly:mgtdec:v:25:y:2004:i:2:p:109-120

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Scully, Gerald W, 1974. "Pay and Performance in Major League Baseball," American Economic Review, American Economic Association, vol. 64(6), pages 915-30, December. [Downloadable!] (restricted)
  2. Kahn, Lawrence M, 1993. "Free Agency, Long-Term Contracts and Compensation in Major League Baseball: Estimates from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 157-64, February. [Downloadable!] (restricted)
  3. Akerlof, George A, 1981. "Jobs as Dam Sites," Review of Economic Studies, Blackwell Publishing, vol. 48(1), pages 37-49, January. [Downloadable!] (restricted)
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Cited by:
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  1. Jahn K. Hakes & Chad Turner, 2008. "Long-Term Contracts in Major League Baseball," Working Papers 0831, International Association of Sports Economists. [Downloadable!]
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