How Much are Guaranteed Contracts Worth? Evidence from Major League Baseball

Abstract

In Major League Baseball, players sign contracts that are guaranteed. What this means is that the player's salary must be paid even if the player's performance does not meet expectations and even if the player is removed from the roster. This is important because guaranteed contracts can potentially have an influence on player effort. In this paper I provide a framework for determining the value of the guarantee to players. The estimates suggest that, on average, top players value the guarantee at $8.5 million annually. The median estimate is $5.71 million. This implies that the average player in the sample would have made 58% more in 2015 on a non-guaranteed contract. Finally, the value of the guarantee is increasing at an increasing rate with respect to a player's remaining salary. This implies that high-paid, superstar players actually see a much bigger percentage decline in their salaries due to guaranteed contracts than other players.