Race, Risk, and Repeated Arbitration
David M. Frederick, William H. Kaempfer, Martin T. Ross, and Richard L. Wobbekind
The salaries of major league baseball players have increased in dramatic fashion during the last 20 years. One innovation responsible for this movement of player salaries toward their presumed market value is free agency. However, another and much more controversial mechanism assisting in this movement is final-offer salary arbitration. No one--not the teams, the players, or the media--seems to have much tolerance for this institution. Kaempfer ( 1995) suggests that this is so because while owners seem willing to shell out huge sums for free agents, they do not like being ordered, in arbitration, to pay big salaries beyond their control. Players, on the other hand, see arbitration as an often demeaning process where they must suffer the indignity of having all of their weaknesses exposed before someone who will then pass judgment on their earnings.
These views notwithstanding, research on the impacts of baseball's final-offer salary arbitration procedure suggest that the threat of arbitration has actually encouraged good faith bargaining and negotiated settlements [see e.g., Dworkin ( 1981, 1986); Scully ( 1989); Jennings ( 1990)]. Frederick, Kaempfer, and Wobbekind ( 1992) further imply that repeated exposure to salary arbitration may indeed be beneficial in obtaining the true market value of all players eligible for the process. Yet, with the controversy that surrounds this process, it is clear that the true richness of the mechanism and its effect on bargaining have not been captured. Thus, this chapter is motivated by the broad objective of better understanding the nature of baseball's final-offer salary arbitration procedure.
More specifically, the purpose of this paper is to expand the research of factors affecting behavior in baseball's salary arbitration process begun in Frederick, Kaempfer, and Wobbekind ( 1992). While continuing to explore the peculiarities of the baseball industry (i.e., team market size and collusion) and