On November 22, 2013, GSABR members Preston Barclay, Kyle Franco, Camden Hu, Nik Oza, and Xavier Weisenreider competed in SABR President Vince Gennaro’s Diamond Dollars Case Competition against twelve other schools at NYU in New York City. The case involved the forecasting of the free agent contracts of catcher Brian McCann and pitcher Ubaldo Jimenez by forecasting the players’ future production and other factors inherent to the free agent market, particularly the attachment of a qualifying offer on the two players, which would result in the loss of a draft pick for the signing team. The article below is part 2 of a series on the team’s research over a five day span from Sunday, November 17 until the competition.
If the magnitude of deals for free agents like Robinson Cano and Jacoby Ellsbury already seem astronomical to you, the market rate might be even higher than what you see on the surface. Both Cano and Ellsbury were signed with draft pick compensation attached. If MLB teams are evaluating the draft picks accurately, the valuations of Cano and Ellsbury are even higher than just the pure dollar amount of their contracts. How much should the draft picks that teams are forced to give up as compensation reduce the overall value of these contracts? To answer the question, we have to determine how much the draft picks are worth by themselves.
Numerous studies have been done on the value of draft picks. The methodology I followed most closely is Nate Silver’s. I looked at all the first round and supplemental round picks from 10 drafts from 1995 to 2004. This made the sample a bit uneven, as there were 10 no.1 picks but only seven no. 40 picks in my sample. I did not apply any plate appearance or innings filter to determine the exact number of seasons the player is under team control. Instead, I considered each player’s first seven seasons in MLB, regardless of his playing time. Some players, like Josh Hamilton, end up getting an extra year of service, while some who shuffle between the majors and minors would lose seasons under team control under this system. This is a graph of the WAR produced by each pick in their first seven seasons according to Baseball-Reference.
I fit a logarithmic regression of WAR produced in each season by each draft pick number to calculate the expected WAR of each pick in their first seven seasons. I assumed that draft picks in the 2014 draft would make their major league debut in the 2017 season and remain under team control through 2023. Using a starting $/WAR figure of 6 million in 2014 and an annual growth rate of 5% (which seems to be the general consensus), the market value of each pick’s production can be calculated. I assumed that the salaries of a draft pick are as follows:
First season: $250,000 (only in the major leagues for part of the season)
Second season: $500,000
Third season: $750,000
Fourth season: 20% of market value (comprised of those eligible for Super 2 arbitration and those on minimum contracts)
Fifth season: 40% of market value (1st year of arbitration)
Sixth season: 60% of market value (2nd year of arbitration)
Seventh season: 80% of market value (3rd year of arbitration)
The player salaries are then subtracted from the market value of the player to determine the surplus in value of each pick. The surplus is further discounted at an annual rate of 5% to reflect the overall growth in salaries across baseball and how much the surplus is worth during this offseason. We also need to account for the signing bonus of each pick. In the 2013 draft, the draft slot (each pick is assigned a starting salary based on which pick number they were drafted) increased by 8.20% from 2012. I assumed that the draft slot in 2014 will grow by the same amount and that each pick would sign for exactly the amount as their draft slot suggest. The total discounted surplus, minus the signing bonus, is the net value of each pick in this offseason.
The average value of picks 11-40, picks that would be given up when a new team signs a free agent with qualifying offer, is $9,150,723 ($11,227,229 using $7M/WAR in 2014). Additionally, teams who re-sign their free agents are effectively abandoning a compensatory pick in the 25-35 range, with an average value of $6,984,245 ($8,662,840 using $7M/WAR in 2014).
Using this evaluation, the Mariners should be valuing Cano at $245 million over 10 years in order to pay him $240 million, as they are giving up their second round pick (36) worth around 5 (6.5 using $7M/WAR in 2014) million dollars. The Yankees should be valuing Ellsbury at $165 million over 7 years to give up their 18th pick worth about 12 (14.5) million dollars. Similar to the Cano contract, the Mets’ deal with Curtis Granderson is not as strongly affected by the draft pick attached, as the Mets are only giving up their second round pick. These valuations do not sound very different from the players’ actual contracts.
However, if you focus on smaller deals, the value of the draft pick can change your perception of the contract drastically. For example, it might not be difficult to imagine Mike Napoli worth $32 million over 2 years, but once the draft pick is factored in, the Red Sox are essentially valuing him at $39 (40.5) million. The same applies to Carlos Beltran. Many writers have already regarded Beltran’s $45 million deal over 3 years as an overpay, and it would be even harder to fathom the Yankees valuing him at $57 (60) million. Hiroki Kuroda is a special case, as he was rumored to be choosing between the Yankees and returning to Japan. If he were to leave the major leagues, the Yankees would not have received a compensatory pick. Therefore, Kuroda’s contract can be evaluated at face value without the consideration of the draft pick.
From the contracts of Beltran and Napoli, it seems fair to question if MLB teams are evaluating their lost draft picks properly. My study on the value of draft picks is hardly definitive. More drafts can be included, and calculating the exact number of seasons under team control would improve the accuracy of the results as well. Nonetheless, it should at least raise some questions about the recent free agent signings. Maybe the market rate for wins is even higher than we have seen on the surface. Or maybe this is still a market inefficiency that can be exploited by an analytically inclined team.
Image courtesy gammonsdaily.com
Data taken from baseball-reference.com
Georgetown University Class of 2017