Notes on sports free agent markets
Posted by disappointmentzone on 16 August 2006
The other day I wrote that if the Cavs sign Gooden to a one-year deal, thus allowing him to become an unrestricted free agent at the end of the next season, he would likely, in a year’s time, no longer be a Cav. The most likely cirumustance for Gooden’s departure would be that a team would overpay for him, making him an offer no other team would even consider approaching, and he would accept it. (It should be noted that the Cavs would be able to offer Gooden as much money as any other team because of the Larry Bird Rule, which allows players who have played the last three seasons without being waived or changing teams as a free agent to be signed for up to the maximum even if doing so means the team would exceed the salary cap.) This is often how free agency works. Just this offseason we’ve seen Peja Stojakovic sign with NO/OK for five years, $64 million; Jason Terry signing for six years, $57 million; Nene signing for six years, $60 million; Ben Wallace signing for four years, $60 million; John Salmons signing for five years, $25 million; Jared Jefferies for five years, $30 million; the list goes on and on. Jefferies signed with the Knicks because the Wizards, his previous team, wouldn’t match the offer. Same story with Wallace, Salmons, and, to some extent, Stojakovic. Nene was a restricted free agent, but no team offered him nearly as much as Denver. Same with Terry. This practice is even more common in baseball, where there is no salary cap. The biggest contracts in baseball are all the result of a renegade GM offering a player far more money than any other team.
One might argue that what a team pays a player in the free agent market is the natural, instrinsic price of the player; that the laws of supply and demand bring the price of the free agent into equallibrium. Nene is ‘worth’ $60 million, in other words, because that’s the price he’s worth on the market. This is silly, of course. No player has an instrinsic value. Each player has a marginal utility to each team. One Ben Wallace might be worth $60 million to a team without an able rebounder and low post defender. But to a team with four Ben Wallaces, another Ben Wallace isn’t worth much. There are only so many rebounds to go around, after all (though a team of five Ben Wallaces would certainly generate a lot of rebound opportunities). Each player has a relative value.
A question worth raising is why there are so many overpaid players but very few underpaid players. How often do we hear that one team, in signing a free agent, got a deal? Not very often. The reason this is so is simple. For one player to be overpaid it requires one of 30 GMs to offer a player money that no other GM is willing to offer. For a player to be underpaid it requires all 30 GMs to undervalue the player. One of the reasons player salaries keep escliating at such high rates is because of the rogue GM (what brings GMs to offer players so much money is another issue).
The amount superstars are paid is not very interesting–The LeBron Jameses and Dwayne Wades of the NBA will always be paid the maximum (or at least that was how it worked before they decided to take shorter deals and excellerate the process of becoming unrestriced free agents). But waiting for the market to sort itself out before offering a player a contract–which is what the Cavs did with Gooden–is suited for paying players a lot of money. And this is interesting. If a rogue GM offers a player a ton of money early in free agency that price is often used as a benchmark against which all other contract negotiations are set for players of equal ability and position. Gooden’s agent, after Nene signed the the Nuggets, sought a contract of equal value for Gooden from the Cavs. How these players sort themselves out through free agency is always the most compelling aspect of it despite the column inches above the fold and the Sports Center teases about which big-name free agents are on the move to which teams and for how much money.
Or at least it was until the Ducans and Jameses and Wades hired agents who, you know, actually thought about how free agency worked, and engineered contracts accordingly.