Dodging the Draft: Analyzing the Competitive Impact of Baseball’s Amateur Draft
1. DODGING THE DRAFT : ANALYZING THE COMPETITIVE IMPACT OF BASEBALL’S AMATEUR DRAFT Steve Argeris Willkie Farr & Gallagher LLP New York University JD/MBA
2. How Do Baseball Teams Acquire Amateur Players? Three primary market sources: Heavily Regulated: the MLB Rule 4 Draft, which applies to amateur players from United States, Canadian and U.S. territories (mainly Puerto Rico). Cuban defectors to the United States or Canada. Moderately Regulated: Professional players from the Japanese, Mexican and Korean professional leagues. Lightly Regulated: Amateur players not subject to the draft, Cubans who defect outside the U.S. or Canada.
3. What’s the difference? Potential versus performance: Caribbean players tend to be signed younger (16 to 17 years old) than North Americans (18 to 22) and have faced less-organized competition. Bonuses: Around 35 Dominican and Venezuelan prospects have gotten signing bonuses of $1 million USD or more. Roughly the same number of MLB drafted players received $1 million USD in 2010 alone. MLB teams collectively spend ~$180 million on drafted players’ bonuses, and ~$60 million on Caribbean players. This suggests there is a discount rate of 80% applied to non-Cuban Latin American versus drafted prospects.
4. So why are there so many complaints? MLB does not like the rising costs of signing bonuses. The MLBPA does not like non-members getting such high bonuses (at the cost of the current membership’s salaries). The public does not like the holdouts (nearly all top prospects sign within hours of the August 15th deadline). The rest of the Caribbean fears inclusion in a worldwide draft.
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6. 1996 loophole allows four amateur American players to escape the draft and sign for as much as five times the amount of the top pick.
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8. So why not just include everyone in the draft? Using Baseball America’s Top 100 Prospects as a guide, and valuing them as per Wang (2008), we see the draft does a pretty good job of distributing the top 100 prospects who were picked in the top 100 picks of the draft. After that, it works about as well as the Caribbean’s free market.
9. Most teams are only good at either the draft or signing Caribbean players (or neither), not both. Between 1995-1999, only a handful of organizations were able to capture above-median value from both the draft and the Caribbean. These teams came from both bigger and smaller markets...
10. …and few do either well for more than a few years. …and only two teams were able to maintain above the median talent pools in both undrafted and drafted players a decade later (the Braves and A’s).
11. What would a a global draft look like? For two decades, Puerto Rico produced 5-10 major leaguers per year. Now it has two or three. The number of Venezuelans skyrocketed soon after Puerto Rico joined the draft in 1990, and the number of Puerto Ricans declined dramatically despite MLB adding four teams (and 100+ new MLB jobs.).
12. Puerto Rico also stopped producing top talent Puerto Rico has not had more than one Baseball America Top 100 prospect in a single season for more than a decade. It used to have about four per year, a massive amount (per capita) relative to Venezuela and similar to the Dominican. Rookie of the Year vote-getters also declined. N.B.: inclusion in the draft helped Canadian players.
13. What are the draft’s major problems? The draft is really good at allocating the top 100 or so players among teams evenly. It’s not perfect at it---”signability” problems appear here to stay. Most players outside the top 100 picks are somewhat fungible; the draft increases their price by decreasing liquidity. The draft does not reward good management inherently; it rewards poor performance and deep pockets as much as savvy scouting and management. Teams have no incentive to invest in Puerto Rico and inner cities.
14. What would a good solution accomplish? More rigorous cost controls for teams. No more “signability” problems---teams pick best players, period. Less time to free agency = more liquidity. Incentives towards effective management of resources, both small and large budget items. Increased potential for “property rights” incentives in areas where the game needs to develop (e.g., Puerto Rico…or Washington, D.C.).
15. Proposal for a Limited Draft Three rounds plus compensation picks. Hard-slotted bonuses All drafted players and big bonus international players sign major league contracts (thus joining the 40-man roster). Draft-and-follow rights. This would lead to the top talent being distributed more evenly, greater liquidity in the marketplace, and greater rewards for effective management.
