September 27, 2010

Derek Jeter’s Contract: A Microeconomic Analysis

One of the most famous baseball players on the most famous team, Derek Jeter’s image is directly tied not just to be baseball, but as the icon of the New York Yankees. He has been their star player and the face of the franchise for nearly two decades now. This legacy that Jeter has built up, however, is going to pose some unique problems for the Yankees this coming winter. As his current contract expires, how will the Yankees handle contract negotiations? 2010 has been Jeter’s worst season statistically by far, but all signs point towards Jeter receiving a new contract far above what would be perceived as the equilibrium for a player of his caliber and age.

The author of the article, Dan Le Batard, estimates that a comparable player of Jeter’s age and skill would likely receive no more than $10,000,000 for a single year. He then goes on to guess that the Yankees are going to have to pay Jeter five times his market value. Both of these statements from a baseball economic perspective would be agreeable to nearly everyone. From these figures, we can then gain a better insight into the Yankees’ mentality.

The Yankees are overpaying dramatically, at the very extremes of the demand curve for Jeter and certainly far beyond the equilibrium. Why on Earth would an organization pay so much money to someone whose market value is clearly not even in the same realm? The author’s guess: public relations; sentimentality. This variable cannot be considered in the basic supply and demand curve, as the consumer category which would likely be applicable – tastes and preferences – is held constant. When that factor is taken into account, however, we see that the preference that the Yankees have of bringing Jeter back on board as opposed to some other shortstop is worth roughly $50,000,000. Sure, the Yankees have the bottomless wallets that allow them the luxury of overpaying for their aging star’s last hurrah. It is interesting to consider, though, from a microeconomic perspective, how much Jeter’s likely contract stands in defiance of the perceived equilibrium from our model.


Robert Birch said...

You should look at his WAR stats.

Larry Eubanks said...

Perhaps you have not thought through the market model in this case.

Consider a labor market, and ask who is behind the demand curve for labor? The owners of the teams bid against each other for players, and their willingness to pay is reflected in the demand curve. How much should they be willing to pay? Is the answer just related to a player's offensive and defensive stats and abilities? Perhaps for many players, but in the case of star players the player's value is also a function of the fans choices to come out to the park to see the stars. So, the considerations you suggest aren't in the model are actually in the model. The player will be paid what an employer believes is the player's "marginal revenue product."

Eric Posch said...

Robert - Oh, I'm familiar with WAR. While he's definitely still an above average shortstop, Fangraphs values him as a 9.3 million dollar player, far less than he'll undoubted be earning.

Prof. Eubanks - Very interesting points. I had not considered it from that particular perspective. My analysis was looking primarily at 'on field performance vs. on field demand,' I didn't properly consider it as a 'labor/demand for labor' equation as much as I should have. Thanks for pointing that out!