Research Papers

Richars Paulsen

Abstract: This paper uses Major League Baseball data to examine the relationship between years remaining on player contracts and player performance. There is a potential for moral hazard to arise in this principal-agent relationship as the player may choose a less than optimal level of effort from the perspective of the team when the player has many guaranteed years remaining. This is referred to as shirking. The key challenge in identifying shirking in this setting is that there is positive selection into multi-year contracts. Only the best players are signed to multi-year contracts. To address this positive selection, a player fixed-effects estimation strategy is employed which finds a negative, significant relationship between years remaining and performance. The primary contribution of this work is to show that this relationship is due to shirking. Alternative explanations for this relationship, that teams sign improving players to multi-year contracts or players face an adjustment process when joining a new team, are addressed. Sources of player heterogeneity where shirking is most or least likely are identified. Additional evidence shows that shirking occurs on offense, not defense, and for position players, not pitchers.