FanPost

Market Failure, Free Agency, and the Orioles

Jamie Squire

This week, the question of the Orioles and their lack of spending in free agency led to a feature piece at Grantland by Jonah Keri. In it, Keri details many things already familiar to those who follow the Orioles, such as the MASN contract and how that benefits the Orioles, as well as other information that was new to us, such as the support that MLB has been giving the Nationals and a variety of ways that the Orioles are concerned they could lose a lot of their MASN-related revenue.

For all its merits, however, the Keri piece follows the conventional pattern of looking at how the Orioles do and don't spend money - by looking at the amount of money they have to spend. This perspective, while valuable, only looks at half the picture. Having money to spend is nice. It means little, unfortunately, when separated from the supply side of the market. What can the Orioles spend the money on?

Keri points out that the Orioles, who have the ability to improve significantly at both second base and in the rotation, did not pursue either Robinson Cano or Masahiro Tanaka, the top free agents at those positions. Both players received contracts which will cost their signing teams over $20 million a season. 18 players in MLB were paid over $20M in 2013. Here they are, in order of salary, along with their fWAR totals for 2013:

A-Rod $28M, 0.5 WAR

Johan Santana $25.5M, 0 WAR

Cliff Lee $25M, 5.2 WAR

Joe Mauer $23M, 5.2 WAR

CC Sabathia $23M. 2.7 WAR

Prince Fielder $23M, 2.2 WAR

Mark Teixeira $22.5M, -0.2 WAR

Tim Lincecum $22M, 1.6 WAR

Adrian Gonzalez $21M, 2.8 WAR

Miguel Cabrera $21M, 7.6 WAR

Vernon Wells $21M, -0.8 WAR

Matt Kemp $20M, -0.4 WAR

Ryan Howard $20M, 0.4 WAR

Justin Verlander $20M, 5.2 WAR

Roy Halladay, $20M, -0.8 WAR

Barry Zito, $20M, -0.6 WAR

Matt Cain $20M, 1.3 WAR

Carl Crawford $20M, 2.9 WAR

The average fWAR of a player earning $20M+ in 2013 was 1.933. There were more players earning over twenty million dollars in 2013 who were below replacement level than there were players who were worth more than three wins.

Of course, many of these contracts were signed years ago. Teams have gotten smarter, and better about assigning dollar values to talent, and in any case many of these players' contracts didn't reflect their value for this season alone but their value in previous seasons. New free agents should provide teams with more value for their dollar. Here are the ten largest free agent contracts signed before the 2013 season, along with each player's 2013 fWAR total:

Zack Grienke $147M, 2.9 WAR

Josh Hamilton $125M, 1.9 WAR

Anibal Sanchez $80M, 6.2 WAR

BJ Upton $75M, -0.6 WAR

Nick Swisher $56M, 2.4 WAR

Edwin Jackson $52M, 2.0 WAR

Michael Bourn $48M, 2.0 WAR

Angel Pagan $40M, 1.3 WAR

Shane Victorino $39M, 5.6 WAR

Kyle Lohse $33M, 1.8 WAR

These players did do better than the highest paid players in the game in 2013. But not much better; collectively, the ten highest paid free agents going into the 2013 season averaged 2.55 fWAR each. And only two of the ten provided more than three wins.

Valued by fWAR, five of the ten most valuable position players and two of the ten most valuable pitchers were not yet eligible for arbitration in 2013. Only one of the 20 most valuable position players and three of the 20 most valuable pitchers had ever been a free agent. Two of the three pitchers who were free agents were only free agents when they came to MLB from Japan. 14 of the top 20 pitchers and 12 of the top 20 position players have spent their entire MLB careers with the team that initially acquired them. Only 6 of the 18 highest paid players in baseball can say the same. Those six had a higher average WAR than the 12 other $20M+ players who changed teams, but still as a group underperformed their contracts with an average WAR of 2.2167.

What can we conclude from this? First, there is not an active market for the best players in baseball. Most of the best players in baseball will be available to only one team for as long as they are among baseball's best. Second, of the players who do become available to the market as a whole, their volatility makes it highly improbable that you can project them to remain among the best players in baseball, both in the short term and the long term. The short term mitigates the downside risk of the player performing at or below replacement level, but both the mean and the median are below three wins.

The counterargument is that success through savvy free agent signings is possible. The 2013 Red Sox are perhaps the best example of this: they added 19.4 wins on the free agent market in the forms of Victorino, Mike Napoli, Stephen Drew, Jonny Gomes, David Ross, Koji Uehara and Ryan Dempster. This was good for an average of 2.7714 fWAR each. While the 2013 Red Sox were heralded for not having behaved like a big budget team, however, these seven players added $53.1M to their 2013 budget alone - a number that most teams in baseball could not possibly afford on the free agent market in a single offseason. But even this spending was only effective for the Red Sox because they paid well below market for the results they received: these seven players produced wins at an average cost of $2.7371 per fWAR. One can debate whether the market undervalued these players or that the players performed beyond reasonable expectations in 2013. What is undebateable is that these players were not valued by the market in a manner that is reflected by their subsequent performance.

What we see in the current free agent marketplace is a market where the best performers are almost never available, the players most highly valued by the market show highly volatile returns with a significant risk of absolute loss in both the short and long term, and even the model for success requires both high spending and the acquisition of assets that outperform their expected return. In such a market, any team paying market price for players to fill "needs" should rationally expect a below average return.

This model would suggest that adding both Cano and Tanaka could be reasonably expected to add six wins. The players they would replace on the Orioles are Ryan Flaherty and Kevin Gausman, each projected to add one win. Discounting the length of their contracts, the surplus wins of adding Cano and Tanaka would cost the Orioles over twelve million dollars per win - nearly ten million dollars more per win than the Red Sox paid last offseason. And that's with ignoring the other fifteen seasons Cano and Tanaka will be under contract.

The Orioles certainly seem to be able to spend more, and are at the right place in the win curve to do so. But it seems perfectly sensible that the Orioles see the top end of the free agent market as one where the downside considerably outweighs the upside, and the free agent market in general as an inefficient place to add significant returns through high spending.

FanPosts are user-created content and do not necessarily reflect the views of the editors of Camden Chat or SB Nation. They might, though.

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