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How do MLB teams price free agents?

Posted by Andrew Mooney  December 18, 2012 01:09 AM

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With the signings of Josh Hamilton and Zack Greinke last week, the Hot Stove reached its boiling point. Another year, another awe-inspiring spectacle of money being thrown around by front offices desperate for a new toy.

The cash hemorrhages we see every winter for top free agents leads me to wonder if teams ever hope to accrue back the value of a contract like Hamilton’s or Greinke’s. But for every massive free agent contract, there are many more sensible, well-negotiated moves that are not subject to the superstar premium. This fact leads to the broader question: how do MLB teams price the free agents they sign?

For an easy, comparable measure of value, I’ll use WAR. This allows me to assess position players and pitchers together, so I can come to a total rate that teams pay free agents for their per-unit value.

I compiled a list of all the free agents to sign with an MLB team as of Tuesday night, then recorded their WAR from the 2012 season, which I used as a projection for how we might expect them to perform in 2013. Obviously, this is a quick and dirty method for predicting performance—it doesn’t incorporate age or injury history, for one thing—but recent form is essentially what front offices are paying for. I am not suggesting that every player is going to exactly replicate his play from a year ago, but rather that this is the primary criterion by which a team and a player settle on a contract.

Next, I logged the per-year dollar average from each player’s new contract—essentially, what his team will be paying him in 2013. With these pieces of information, I was now able to estimate the going market rate per WAR.

Thus far, teams have allocated about $453 million in 2013 for an expected 98.7 WAR, which comes out to $4.6 million per WAR. The average per-WAR cost for last year’s free agent class was $4.5 million, so the market has remained essentially the same. In fact, assuming two percent inflation from one year to the next, the figures are exactly the same, with the extra $0.1 million simply a product of the general rise in the price level.

For their part, the Red Sox have not exactly been buying low this offseason. The six players the team signed this offseason project to produce 13.7 WAR, at a cost of $116.75 million in 2013. That amounts to $8.5 million per WAR, or nearly double the rate of the rest of the league. This number is a bit inflated, given that the Red Sox are banking on more productive campaigns in 2013 from Mike Napoli and Stephen Drew, but the front office certainly wasn’t playing hardball during its negotiations.

With most of the big free agent names now off the market, this number is not likely to change much in the coming weeks. The Sox will have to depend on the notion that they rightly overpaid for premium performance, something that hasn’t quite held up for the past few free agent classes to come to Fenway.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Stats Driven is powered by David Sabino, who over the last two decades has been a source of statistical analysis on the pages of Sports Illustrated, New York Times, and Chicago Tribune. David has written about all seven recent Boston-area championships for Sports Illustrated Presents commemorative issues, was the creator of such long time features as SI’s Player Value Ranking, NBA Player Rating and long running fantasy football and baseball columns.

He has also authored or made contributions to many books, including the Sports Illustrated’s 100 Fenway: A Fascinating First Century.

Now living in Marblehead, he’s focusing his attention on the Boston sports scene, specifically delving into the numbers affecting the Red Sox, Patriots, Celtics and Bruins, with the goal of informing and entertaining real fans. You can follow him on Twitter at @SabinoSports.

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