FREE AGENCY, LONG-TERM-CONTRACTS AND COMPENSATION IN MAJOR-LEAGUE BASEBALL - ESTIMATES FROM PANEL DATA

Using longitudinal data for Major League Baseball players, this paper estimates the effects of eligibility for free agency or arbitration on compensation and contract duration. Because eligibility is based on experience and better players are kept longer, a fixed effects approach is used. Arbitration and free agency eligibility both raised annual compensation; however, only free agency raised contract duration. The free agency findings are consistent with Nash bargaining; however, additionally considering the arbitration results suggests the ''winner's curse'': duration rises only when a team might lose a player. The auction market is thus avoided.