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Uncertainty, specific investment, and contract duration: evidence from the MLB player market

Author

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  • Hsuan-Yu Lin

    (Taiwan Institute of Economic Research)

  • Chih-Hai Yang

    (National Central University)

Abstract

This study empirically investigates how uncertainty and specific investment determine contract duration. Using detailed individual labor contracts of Major League Baseball players, the empirical estimations find that, given that players are more risk-averse than clubs, contract length exhibits a positive relationship with the level of productive uncertainty. This implies that the risk-sharing hypothesis dominates the competing hypothesis of efficient production in individual labor contracts. Moreover, contract length is positively related to specific investment, highlighting that the prediction of the transaction cost theory also holds on individual labor contracts.

Suggested Citation

  • Hsuan-Yu Lin & Chih-Hai Yang, 2016. "Uncertainty, specific investment, and contract duration: evidence from the MLB player market," Empirical Economics, Springer, vol. 50(3), pages 1009-1028, May.
  • Handle: RePEc:spr:empeco:v:50:y:2016:i:3:d:10.1007_s00181-015-0963-6
    DOI: 10.1007/s00181-015-0963-6
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    References listed on IDEAS

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    Cited by:

    1. Panu Poutvaara & Tuomas Takalo & Andreas Wagener, 2017. "The Optimal Duration of Contracts," CESifo Working Paper Series 6808, CESifo.

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    More about this item

    Keywords

    Contract; Uncertainty; Specific investment; MLB;
    All these keywords.

    JEL classification:

    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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