July 25, 2014

Skewed Left

The Mismatched Incentives of Draftees and Their Agents

by Zachary Levine

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When the Astros last took us back to economics class, it was for what was generally regarded as a good thing on their end. They showed how a team can use not only their leverage, but the misaligned incentives of individual players and their collective to get what appeared to be a good deal for Jon Singleton. (Whether or not Singleton’s .179/.263/.340 start with a 37 percent strikeout rate changes your opinion of the deal now, the economics do not change.)

Now somehow, a month later, we’re back. It’s probably not a coincidence that it’s the Astros again. This is what they do. From the first pick of baseball’s new amateur economy, this is what they’ve done. They play with the rules, they use their leverage, and now they’re going to be one No. 1 overall draft pick short of a trio at Camp Kissimmee next year.

But in the mess of a negotiation that has left Brady Aiken an amateur, there is—beyond the player, the team and the union—a new agent in the picture that had not been considered in the game theory analysis of the Singleton situation. That agent is the agent. Or if we must, the advisor. We must? OK.

The agent was mentioned in the Singleton analysis, but he was mentioned as a factor that should be working both ways. The agent of an established player wants foremost to guarantee himself the payoff for the deal that he negotiates. The player could leave at any moment, and if you haven’t locked in the multi-year deal, you’re the one getting nothing. At the same time, the agent doesn’t have the same pressure to lock in life-changing money that the player does.

It’s this latter factor that complicates the Aiken story.

Assuming the reports of a $5 million signing bonus offer (roughly 37% below the pick’s slot value) are true, this amount, net of taxes and fees, is life-changing money for a 17-year-old. It would change the lives of 99.9 and then some more 9s percent of the people on this earth. The difference between $5 million and $8 million is so much smaller than the difference between even $5 million and $2 million and almost negligible compared to the difference between $5 million and $0 million.

For a wealthy agent—the Boras Corp. reportedly made $12M in commissions last year; Aiken’s advisor Casey Close represents Derek Jeter and Ryan Howard and got the doozy of a deal for Masahiro Tanaka—the difference between getting $0 and getting $250,000 isn’t going to break him. It’s probably just 5/3 the difference between $250,000 and $400,000 like the numbers suggest. The only key is not getting fired.

There has been nothing reported that Close was the one who sabotaged the negotiations to the point that there was reportedly almost none to speak of as the Astros increased their offer in the final hours. That’s not the point. Although the Astros’ situation is what has everybody talking about draft negotiations, analyzing the influence of an agent isn’t really about Aiken at all. Nick J. Faleris did an outstanding job evaluating all the incentives and best alternatives that went into Aiken’s negotiation with the Astros in his piece Wednesday.

This is about the next guy. And it’s about what incentives the agent will have when advising a draft pick.

The question going forward is about the incentives of agents vs. players in draft negotiations. While the two are supposed to be on the same side when they go up against the team in negotiations, game theory would say that the two can come to the table playing very different games.

Players are, for the most part, playing a one-shot game in which they have little leverage. As mentioned above, the difference in the value of the money to the player vs. the team and the player vs. the agent is a good deal what’s driving that. But where this deviates from the long-term extension candidate is that the alternative is terrible.

The college-bound player is going to receive less than ideal coaching over a less than ideal schedule. He’s going to have to go to school rather than focus on baseball all the time. He’s not going to get paid. He’s going to have to enter a draft three years from now. And forget about the present value of money, and forget about what’s he’s foregoing in distant future salary by delaying his debut, arbitration and free agent years, the chances that he even gets the same money then are pretty darn slim. The chances that he gets it if something happens with an elbow or a shoulder… college parties are fun, though, I guess.

Even if a team lowballed the hell out of a healthy player, pretty much any offer that makes you a millionaire and gets you into the professional system today is going to be better than the best alternative to a negotiated agreement.

(Aside: These last two paragraphs were the reasoning behind this 2013 piece on looking for baseball’s equivalent of the NBA’s Brandon Jennings, who skirted the college pipeline. Absent their future union actually caring about them in the next CBA, amateur players really need a better best alternative when they come to the table.)

So that’s how the one-time game is supposed to work. Team holds the leverage, team makes the slotted or lowball offer, often doing it before the draft and threatening that no team will take you for x more picks, so it’s actually a generous offer. Player’s best interest is to take it. He never has to do this again, and in the rare event that the player goes back into the draft, the situation has changed so much that it’s a totally different game.

Not so with an agent, though, especially a big-time agent who advises players every year in this process.

There’s an additional cost for the agent to consider as he is playing a repeated game, and repeated games have to include reputation costs. The agent will be in this situation again, not with the same player, but with another high school player is getting lowballed. Or worse, with another player who has to hear that a team doctor found a problem. Team doctors can always find problems, and the last thing the agent wants is to be seen as a malleable target who gives in if the team doctor says the right thing. It’s easy to “recruit against” if you’re another agent. It’s easy to use in your favor if you’re a team working on getting a deal done with his next client.

Where the player is negotiating for one deal, the agent is working on this deal and all his future deals.

The game theory says for the player to take the deal in a one-shot game if it’s the best outcome for him and only him and only now.

For the agent, it’s more complicated. The agent in the repeated game wants to take the deal only if what he’s getting now outweighs the present value of everything he’s giving up in the future. What he’s getting now isn’t nearly as much as for the player, and what he’s giving up in the future is an abstract concept but potentially a lot of future success with clients.

And that’s the mismatch that players potentially face even with somebody on their team.

Would I advise my future baseballing kid to go without an advisor through this process? Probably not. He’d have good ideas on how to talk to teams and what to do leading up to the draft. He might even help get you a serious offer.

Given the potential for misaligned incentives, though, I might be real careful how much of the road I let the advisor drive once things start getting interesting.

Zachary Levine is an author of Baseball Prospectus. Follow @zacharylevine
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