Explaining Changes in Organizational Form: The Case of Professional Baseball

The Grossman-Hart-Moore (GHM) property rights model predicts the assignment of residual claims to the party with the largest effect on an asset’s value. While plausible, the model has proven relatively hard to test. In this paper, we develop a formal model based on GHM, and use it to analyze an industry that has seen substantial changes in the nature of asset ownership over time: professional baseball. Early in the 20th century, major and minor league baseball teams operated as separate and independent entities, By the middle of the 20th century, the vast majority of minor league teams had become “affiliates” of major league franchises, either through vertical integration or contractual agreements. By the end of the 20th century, full vertical integration had become much less common (and was restricted mostly to the lower minor league classifications), while the nature of contractual claims was essentially split, with major league clubs holding rights over players and coaches and minor league “owners” holding rights over local revenue sources. To explain these changes, we focus on two important functions of minor league baseball: providing local entertainment and training potential major league players. We conclude that as the relative value of these activities changed, so did the structure of ownership. JEL Classification: L14, L22, L83 Key words: Contracts, Professional Baseball, Residual Rights, Vertical Integration