A Test of the Resource‐Based Model Using Baseball Free Agents

Abstract

This paper examines a nearly untested premise of the resource‐based view of the firm: managers can exploit uncertainty about a factor's true value to generate returns. Our results show that empirically validating this basic proposition is difficult and potentially impossible, despite our use of a rather simple empirical setting. While market imperfections appear to underlie the payment of baseball free agents, we cannot easily determine whether this imperfection constitutes a return or not. In addition, while we find convincing evidence of uncertainty underlying owner's expectations of a free agent's performance potential, it is not clear whether team owners can exploit this uncertainty by amassing superior informational strategies or investing in complementary assets. Our difficulty in testing resource‐based propositions suggests limitations to the theory's practicality.