I was going to name this article "Exploiting the PECOTA growth curve by using performance as a leading indicator for future wages," but I actually wanted people to read it.
Baseball has a unique salary structure that provides incentives for teams that develop young players and penalizes teams signing free agents. The first three years in Major League Baseball (MLB), players are paid the minimum salary, which this year was $316,000. Prior to years four through six, players go through the arbitration process to determine their salary. The arbitration process begins with the team and player both exchanging salary figures for one-year contracts. If the sides come to an agreement at this point, salary arbitration can be avoided. If the sides do enter arbitration, an arbitrator will research the situation and decide.
Arbitration allows teams to offer players low-risk, one-year contracts below the free agent, open market wage. A paper by John D. Burger and Stephen J.K. Walters, from Loyola College in Maryland, quantifies the arbitration discount.
After a player has amassed six years of service, he is a free agent. This is a baseball player's big payday - guaranteed pay - because in MLB all player contracts are guaranteed even if the player gets injured or suffers a drop in performance. Risk is high in the free agent market due to multiyear guaranteed contracts, as opposed to the low-risk one-year contracts offered to players during their first six years of service. Teams losing players to free agency acquire two draft picks (The pick of the team signing the player and a supplemental pick at the end of a draft round. The round of both of these picks is either the 1st, 2nd or 3rd round, depending on the strength of the player lost).
The growth and decline of performance is linked to age. In a recent Baseball Prospectus study by Nate Silver, "A New Look at Aging," he determined the prime production years for each position and decline in performance. Players generally are in their prime from age 26 to age 30, and afterward begin to decline.
The Oakland Athletics' General Manager Billy Beane exploits the MLB salary structure and player's performance growth rates better than any other general manager in the game. The Oakland Athletics don't rebuild, they reload.
While everybody thought the Athletics were not going to contend in the playoff race, here they are again with a 90+ win season and challenging in the AL West after trading Mark Mulder and Tim Hudson, who both experienced drops in strikeout rate and increases in walk rate, signaling they were on the decline. The Athletics traded two guys who were going to be free agents after this season for young players who can help them now and others who are prospects for the future.
If Hudson and Mulder walked into free agency, the Athletics would have received only draft picks as compensation - instead they received Dan Haren, Kiko Calero and catching prospect Daric Barton from the Cardinals for Mulder, and Charles Thomas, Juan Cruz and lefty pitching prospect Dan Meyer from the Braves for Hudson.
The former Cardinals have contributed this season, with Haren posting a 3.81 ERA with the Athletics over 210 innings, with 157 strikeouts and only 52 walks. Calero is proving to be a valuable arm in the bullpen. Barton is absolutely tearing up AA at age 19. Mark Redman was also sent packing by the Athletics, so Haren and prospects Joe Blanton and Kirk Saarloos were given the opportunity to blossom in the Oakland rotation.
By looking at Baseball Prospectus' PECOTA performance growth system, we see that Hudson and Mulder have actually passed their prime and are in the decline of their careers.
PECOTA uses VORP (Value Over Replacement Player) to show the overall contribution to a player's team by quantifying how many runs they add above what a "replacement" player would add (an average triple-A player). These calculations were done prior to the season, so let's evaluate the rotation if it was left in place and how it performed in 2005 with Haren, Joe Blanton and Kirk Saarloos replacing Hudson, Mulder and Mark Redman.
Here we see that by trading Hudson, Mulder, and Redman, the Athletics improved their rotation and reduced their payroll. By shuttling out two "big name" starters in their late twenties who began to experience drops in strikeout rates and increases in walk rates, Beane traded value past its peak and acquired cost-controlled players entering their prime. I would not be surprised to see Barry Zito in another uniform next year, with the asking price being a Jonathan Papelbon or Chien-Ming Wang.
