How Winning and Financial Power Affect Free Agent Spending

Over the past few days, we’ve discussed the cost of a win in free agency and how that cost has been lowered for slightly below-average players. In this post, I want to examine some of the potential driving forces behind these changes. Specifically, I want to take a look at the following assumptions about how teams operate with respect to paying for wins on the free agent market.

• The closer teams get to the playoffs, the more money they will be willing to spend on players because of the monetary benefits that come from making the playoffs.
• The more money a team has, the more they will be willing to spend on a win on the free agent market because they can afford it, and vice versa (i.e. the Rays won’t spend the same dollars per win as the Yankees because the Rays have to hunt for bargains while the Yankees can afford to make the highest offer to any player they want).

We’ll take these assumptions one at a time. While there isn’t a great way to bucket teams by whether they’re “close” to the postseason without some degree of arbitrariness, I opted to look at a team’s projected win totals for each of the last two seasons, plus its current projected WAR for next season. I put teams into three categories: likely playoff teams, teams with a decent shot at the playoffs, and teams with little to no hope of making the playoffs. For the first group, I included teams projected to win at least 86 games, which usually provides a 50% or greater shot at the playoffs. For the second group, I included teams projected to win at least 77 games, but fewer than 86, which is roughly aligns with the 10%-50% range in terms of playoff odds. In the final group, I put teams with fewer than 77 projected wins.

The table below shows how much each group is spending over the last three offseasons, including this one:

We see winning teams and potential contenders spending way more money overall, but in terms of how much they pay for a win, the difference isn’t huge. If giving a team a shot to make the playoffs were important, we would expect to see that middle group spend significantly more per win than the lower group because they would be outbidding each other. It looks instead like those teams are holding steady, unwilling to go a step further toward providing a greater chance to make the playoffs. While the teams expected to make the playoffs are spending a slightly higher amount per win, the difference isn’t that great. Total spending differs depending on where teams are on the win-curve, but teams aren’t finding a win more valuable, no matter how many wins they expect in the following season. Here’s the same table, except with 2020 alone added:

So far this offseason, we’ve seen a major difference between potential contenders and teams with little chance of winning. It is possible that much of that difference is due to teams at the bottom having only spent around $100 million of the roughly $2 billion spent. As those teams fill out their rosters with the remaining free agents over the next month or two, the figure in the table could move upwards, though it seems unlikely to reach the level of the expected playoff teams and potential contenders. What’s made this offseason an interesting one is the number of teams in the middle trying to make the playoffs. It’s driven up free agent prices on good players. That simply wasn’t the case in years past.

The huge disparity in 2020 means that in the prior two offseasons, teams in the middle spent less than teams at the bottom on a per WAR basis. Teams like the Yankees, Dodgers, Red Sox, and Cubs, as well as the Indians, had, to varying degrees, sat out the offseason when it came to spending, but teams in the middle just followed suit and either didn’t take advantage or used the lack of competition up top to keep prices low. It’s possible we are seeing something different this offseason, but we don’t know whether it is a trend or an anomaly. Given the general lack of competition we’ve seen on the field of late — which seems to be correlated with the past few slow winters — we can be hopeful that the competition this winter will translate to more competitive baseball next season.

Teams that expect to win come in different shapes and sizes in terms of payrolls and financial might so another tack to analyze spending is through the prism of franchise wealth. Instead of separating teams by wins, I divided teams into three groups depending on their franchise value at Forbes. For the top group, I set the cutoff at $3 billion, so only the Yankees, Dodgers, Red Sox, Cubs, and Giants are included. In the middle, I put the 11 teams with values from $1.5 billion to $2.3 billion, with the lowest group comprising the 14 teams with franchise values from $1 billion to $1.35 billion. While the groups are different in number, the total franchise values are pretty close together.

Here’s how those groups have spent over the last three offseasons:

We can argue about whether the small-market teams need to spend less and be more efficient, but the table above suggests that they don’t and they aren’t. Whatever financial might the most valuable teams in baseball have, it doesn’t look like they’ve been using it in the free agent market. The smaller-market teams are spending less per contract, but in terms of projected production, they get pretty close to the same thing as the biggest teams in the sport. Now, we’ll add a column that includes this offseason only:

For the upper echelon, the spending consists almost entirely of Gerrit Cole, with the rest of the big-money teams sitting out free agency. We see the middle class of teams spending more for a win, but then we also see the smaller-markets doing the same. It’s possible to see this as a desirable result with all the teams spending the same for a win, but it is a little odd to see the lack of competition. If there were full revenue sharing, then this might make some sense, but the higher-revenue clubs are making a lot more money than those in smaller markets and simply opting not to spend like it.

We’ve seen many of the richest franchises cry poor over the last few years, and it looks like this offseason some teams closer to the middle are beginning to step up. Because the competition is so staggered, we’ve seen what it looks like with very few teams in on the bidding at all after 2017 and 2018, and we’ve seen what it looks like with a rising middle group this offseason, but payrolls have remained static because everyone has been acting the same no matter how much money their franchise is worth and no matter where they are on the win curve. Competition breeds excitement and that’s good for the game. It’s been lacking the last few seasons and this offseason brings some hope for the upcoming year, but the possibility remains that the decent offseason this year is just an anomaly and we’ll go back to the dullness of previous winters a year from now.