September 4, 2001

The Imbalance Sheet

Draft Caps

by Keith Law

Much ado is being made in the baseball press these days about the high cost of draft picks, and the increasing probability that some sort of draft cap or rookie cap will be put in place in the next Collective Bargaining Agreement (CBA) between the Lords of the Realm and the MLB Players Association. While on its face such a cap is not necessarily a bad idea, there are important counterarguments that have yet to see the light of day. First, however, we'll look at the arguments in favor of capping these payments.

The proposals on the table all involve either capping the amount a team can spend in total across all draft picks (dumb) or capping the maximum payment allowed to a single player, perhaps tied to the round in which the player was drafted (better). The recent brouhahas (brouhahae?) over J.D. Drew, Mark Prior, and Matt Harrington, as well as the high likelihood that between five and ten first-rounders won't sign this year, have given a significant boost to these proposals. The owners have a greatly increased incentive to cap these players, and one can make a good argument that the young players don't benefit from the lost year of development time.

The other main argument in favor of such a system is in maintaining competitive balance. If lower-revenue teams are expected to compete via strong farm systems, wild increases in draft bonuses may hurt their ability to do so. The truth is that the claimed damage to low-revenue teams is more severe than the actual damage, since the run-ups in draft prices tend to be concentrated among a small handful of players at the top of the first round. While the Twins were obviously hurt by their inability--or unwillingness--to sign Prior, it's not clear that bypassing Prior for the higher-risk Joe Mauer was a smarter investment. That aside, the argument in favor of competitive balance says that bad teams should benefit via the draft, and capping the bonuses paid to individual players would at least remove the financial impediments to that goal, although it won't keep the Twitsburghers from converting the best power hitter in the draft into a middle reliever.

There are three primary reasons why we should view any such system with a suspicious eye. First and foremost is the issue of moral hazard. The players association is at the table to represent its current members. Future draft picks are not current members of the association, and having the MLBPA act as their voice presents a conflict of interest. Given the choice between a sacrifice for current members and a sacrifice for non-members, the union will choose the latter. (This is a problem with unions in any industry, of course.) If we had a higher opinion of the business acumen of the owners, we might say that they hoped that future draft picks would be less loyal to the union once they see their early paydays trimmed by an agreement made by an association that purported to represent them.

The second issue is that the drafted players get screwed. Who can begrudge Mr. Prior any of the money he'll earn from the Cubs under this early agreement? How often have you turned down an extra million dollars? Prior's long-term outlook may even be rosier because of his large contract: The Cubs may take more care with his arm than they would with an arm that cost 20% as much.

The final issue is a legal one, perhaps for minds more learned in the antitrust arena than mine is. Baseball's antitrust exemption may still be in force, but Congress may choose to repeal it at any time. A parade of draft picks robbed of substantial paydays may not play well in Peoria, but their wealthy agents have the clout, connections, and funds to make some noise in Congress. Any system that uses collusion among buyers (monopsony) to reduce payments to labor would probably run afoul of antitrust law, and Roger D. Blair and Jeffrey Harrison argued in their book on the subject that the negative effects of monopsonistic behavior are no less harmful than those of monopolistic behavior.

There's no simple solution to this problem, as the irresistible force of competitive balance meets the immovable object of draft picks' rights to every last dime they can earn. But if there was ever an argument to have agents at the negotiating table, this would be it, because there is no other participant in the process who might be expected to stick up for those to-be-drafted-players' rights.

Keith Law is an author of Baseball Prospectus. You can contact him by clicking here.