Inefficiencies, Moral Hazards: The NPB Posting System
On Monday night, the Nippon Ham Fighters announced they would accept the Texas Rangers’ $51.7M bid for 25-year-old right hander Yu Darvish. The decision ended a months-long rumorfest concerning Japan’s best pitcher last season — and put on full display the oddity that is the Nippon Professional Baseball posting system.
Much digital ink has spilled in service to the tricky nature of the MLB-NPB player transfer process. It stinks of inefficiencies; it dances around yet-fully-realized moral hazards; and it is, quite possibly and quite rightly, nearing its demise.
For those who do not know, NPB players who want to leave Japan’s top baseball league before reaching free agency (which typically takes 10 years) must ask their team to “post” them. MLB teams then are informed of the posting and are given a four-day window to place closed-auction bids on that player. Then, if any MLB teams place a bid, the NPB team has four days to accept it (no team has declined yet). The MLB team then gets 30 days to negotiate a contract, and if it doesn’t, the posting fee disappears and the player returns to Japan. This has happened only once.
This system, clearly, is inefficient. If the winning team outbids the next closest team by 271%, then too bad.
Say, for instance, the Red Sox’ bid on Daisuke Matsuzaka — $51,111,111.11 — exceeded the next bid by $17M. Well, the Seibu Lions would do a little dance and gladly accept the surplus amount. In economics, we sometimes call this allocative inefficiency. If I offered to purchase a standard 1999 Honda Civic for 150% of its typical trade-in value, I would be considered crazy — and I would have to start wearing a plaid suit and yell in lots of commercials.
In economics, we typically hate inefficiency; it borders being a dirty word. But to the car seller, this inefficiency is pretty cool. And, let’s remember, this is a designed inefficiency — a sort of restitution for the likes of Hideo Nomo and Alfonso Soriano “retiring” to America in the mid-to-late-1990s.
Imagine if, say, Evan Longoria retired from his contract tomorrow to play for more money with the Yakult Swallows? I suspect he would be the first and last MLB player to do so. The MLB, just like the NPB, does not want to lose its assets so easily.
But the system really only truly benefits the Japanese teams. It not only denies players the financial benefit and flexibility to negotiate with all 30 teams, but the system also creates a funky disconnect of expectations between the player and the MLB team.
With Darvish, I hear he’s expecting a big contract to follow a big posting fee. But in the past, we have seen teams calculate the posting fee into their contract negotiations. This apparently was part of the obstacle between Hisashi Iwakuma and the Oakland Athletics last year. In an efficient system, the A’s would have presumably bid roughly $10M lower and then used the excess cash to secure a contract.
Of course, other possibilities and rumors swirl around the Iwakuma signing. Could the A’s have posted an extra high bid just to block the Anaheim Angels or a divisional competitor? Perhaps.
There is no true penalty — outside of wasted time — for failing to sign a player. In my understanding, if the commissioner thinks a team didn’t place its bid in good faith, he can award the posting to the next highest bid. But how can a commissioner see into a GM’s mind?
All a team needs do is offer a competitive, but not-good-enough contract to the player and negotiations will inevitably break. And thanks to the perspective/expectations problem of the posting fee, it’s easy for teams to find a basis for discord. Plus, there’s no slotting system — no sure-fire way of contract valuation, so I wager one duck that the MLB front office will probably never rescind a posting fee.
Some sort of system is necessary. Chaos like that seen in the 1990s will only lead to the NPB closing itself off like some feudal baseball league. But there’s a problem. The current system might not be the best possible system. The MLB certainly suspects as much. And it appears ready to act: The league has established an international talent committee to explore, among other things, an international draft.
Perhaps the NPB can just work into its contracts a finders’ fee of sorts — much like the original minor-league clubs had or that the United Football League (UFL) has now. Patrick Newman suggests maybe the NPB and MLB could work out a more simple arrangement:
Why not set up some kind of a transfer period each offseason, and let NPB teams and MLB teams negotiate their own transfer agreements?
Scott Boras suggested a sliding scale where the player sets up the contract, but the NPB team gets a decreasingly significant portion of the funds:
For instance, if a player leaves after one year, the Japanese team would get 80% of the contract, 50% after five years and 20% with just one year remaining before free agency.
That’s an intriguing proposal. And it’s one that certainly would not hurt Mr. Boras.
Whatever the solution is, the NPB and MLB need to find it soon.
Why does there need to be any kind of system set up? The system exists solely as a favor from MLB to NPB. There’s no reason that MLB teams shouldn’t be able to sign Japanese players just like any other international free agent.
If we let anarchy / free markets to play out, the NPB as a league will either (1) crumble as all its stars leave for the MLB or (2) react by disallowing ANY player to come to the US and sue any who try.
That’s not good for the MLB and it’s not good for baseball in general.
I agree it could spell the end for NPB as we know it in scenario (1). But how could NPB enslave its employees in scenario (2) ?
I just don’t understand why we should let Japan be special. MLB teams freely sign players from the Dominican, Mexico, Venezuela, etc. If that weren’t allowed to happen, all of those countries would have vibrant professional summer leagues on par with the NPB. But, instead, there is a talent drain towards MLB.
I guess asking for some sort of socialist setup for general baseball health sounds nice (I’d be for it), but what is really happening is a corrupt capitalist system where Japan gets special favors and latin counties are getting screwed over by the big boys. You can’t have it both ways – either latin countries get to sell off their players, or Japan has to realize that there is a free market for labor and suck it up when their guys go to MLB. Whomever is on the side of Monopoly League Baseball is crazy, for this to work fairly we would need an impartial arbiter (and there isn’t one available)
@ yirmiyahu: How much money do you think the central american leagues bring in? The NPB is a billion dollar industry in one of the top 5 economies in the world. You don’t just shut that down without having economic and possibly even political repercussions.
Brilliant idea, Yirmi. MLB should just tell NPB to piss off and sign all of its best players. Just an amazing thought. Keep having those.
Oh, you mean EXACTLY what MLB does to every other country?
Right, because the actual rights and freedoms of the players shouldn’t be considered, just the health of the NPB and the teams! You must have loved reserve clause era MLB.
@haha: MLB does it to everyone else but Japan because Japan’s professional league by far has the most at stake economically. You can’t just collapse a billion dollar industry without severe consequences.
Also, we’re not talking about free agents. We’re talking about players who are still under contract to their team in Japan.
They’re not under contract. The vast majority of NPB contracts are for only 1 year. The only problem is NPB’s version of the reserve clause. Which has nothing to do with their right to play in another league.
“The only problem is NPB’s version of the reserve clause. Which has nothing to do with their right to play in another league.”
If it’s valid under Japanese law, then yes, it does. It absolutely does.
The point is that this how players who are not yet free agents go to the MLB. The article says it takes about 10 years to reach free agency in Japan— when the player will be past his prime.
Boras’s proposal seems interesting. Another possibility is to explore how European soccer works. Certainly the current system seems fundamentally flawed, because the original team just doesn’t have enough motivation to make sure that the player will end up with a fair deal.
How does European soccer handle it?
I think, (not sure, too lazy to look up), that the player’s contract continues with the new team. So the posting fee is to buy the player from the seller.
Actually, no. In soccer (not only European, but in most leagues) the process is public so the player is giving feedback to his team telling them where he would like to play. After an offer is accepted by the selling team, the byer and the player try to get in an agreement regarding the contract. If such agreement isn’t reached and the player refuses the offer, the selling team can immediately after, accept another offer for the player. In fact if the offers are equal or close to equal, the team can accept both offers and the player then chooses who to sign with.
In the end, the soccer player has much more security against being low-balled by a team.
Also, in soccer the transfer market is in effect the free agent market. Good players almost never have their contracts expire.
I must be dense today; I don’t get the reference to Soriano at all.
As to the rest of the article, I agree that something must be done. I think a percentage of contract system might work well, much like the old independent minor leagues (which routinely sold contracts to the majors). Perhaps we need something like the minor-league free agent rule, that a Japanese team loses control of a player after a certain number of years (many fewer than 10), and is compensated on a sliding scale, depending on two factors: the length of service in Japan and the size of the MLB contract.
Yes, MLB should tell NPB that they are now being put on a minor league free agent rule.
I meant negotiate something on those lines. But as opposed to “no system, let them all be free agents” treating them like an INDEPENDENT minor league, kind of AAAA, makes at least some sense.
Your sarcasm and snark add zero to the conversation. Come up with something substantive or go to reddit: they enjoy vapid, snarky comments over there.
LOL @ haha. That’s rich coming from the guy who said this, yesterday:
“Good lord you’re pathetic. He’s a loudmouth POS. And the best SS in Sillies history is saying fuck-all. Can’t wait till all the ancient phillies players fall apart and the fairweather fans go back to booing just the Eagles.”
Oh, Sillies, as in a nickname mocking the Phillies. How clever.
The butthurt is strong in this one. Please stop following me around, it’s starting to scare me.
Seideberg: I get it, you’re a joke explainer. You’re _that_ guy at parties. Yikes.
Alfonso Soriano started out with the Hiroshima Toyo Carp:
http://en.wikipedia.org/wiki/Alfonso_Soriano#1997:_Japan
One of the problems of free-agency is that it predisposes the West and East Coast teams towards success. The Yankees and Red Sox have the cash, the West Coast has the Asian community base that appears attractive to most NPB players.
That’s why I think Japan should have its own draft or be rolled into an international draft, except with extra contract fees and such so as to help compensate the parent team.
But in a draft, what happens when there is a fair and away blow out talent, as is every few years. If Cespedes or Darvish where in a draft, the teams in 2nd or 3rd to last would get screwed just as badly as they would in a posting system. I know this happens with the amateur draft (Bryce Harper), but to much less of an extent.
Except for the fact that Darvish and Cespedes would naturally command more significant contracts. So bottom feeder teams looking to rebuild may not have much interest in mid-20s starters and outfielders.
Good point. Except, correct me if I am wrong, in a draft Cespedes doesn’t have a foot to stand on. The only way he gets the money he deserves is if the market is competing for him. He doesn’t really have anywhere to fall back on if he doesn’t sign.
Right, because obviously the rights and freedom of Japanese baseball stars are being trampled upon, since they don’t make their way out to the US until they are well in their 20s or even 30s. If they were living in America where people have freedom, why they would hit free agency as soon as they turn pro and enjoy their rights and freedom to play for whomever they want.
I think that the players need to at least take some of the damage for the posting fee. If they were to take a bit of a discount, they would essentially be making a down payment to their former team in order to make more money here. The players refusing to take a discount for the fee is ridiculous, as often times it is the player that asks to be posted.
The point is “why do I have to be posted? Why can’t I just be drafted out of high school like americans?” As a latin player “why do I get lowballed just because I come from poverty?” Looking at it from the player’s position, they are being held back by virtue of where they were born, which they didn’t control. I can understand penalizing somebody based on their decisions, but not on things out of their control. Unless their country has a problem with it, I don’t see where their employer has a right to restrict their economic freedom. As it is, they don’t control where/who they play for, and the only option available to change that costs them money? You are the one who is ridiculous for thinking about only one side of the story!
Nor do you control where you play if you enter the draft, and the only option available is to refuse to play at all. Point is, MLB, just like NPB, has strict requirements on player’s labor freedom, to protect its self-interest, and the gov’t allows this because it believes that MLB is an institution that should be protected. There’s no reason to think Japan should play by different rules, just for the benefit of MLB teams.
But are MLB players prevented from going to another country to play? I don’t think so. A country can’t enforce its laws against other sovereign nations. And just because there is a law, doesn’t mean it is fair or the best way to do things.
Actually, Cliff, they can, in various ways; then you’re getting into treaties, diplomacy, and international law. I don’t know what all treaties exist between the US and Japan, but given that we are allies, I would expect that the laws of each country show considerable respect for contracts signed under the laws of the other.
A quibble: economic efficiency is entirely agnostic as to price. An allocation is efficient if the team that had the highest value for the player gets him, regardless of the price. The system is thus only inefficient (economically) if information asymmetries cause the wrong team to win the bidding.
I believe that’s exactly what’s going on. Some teams get the feel for what other teams are bidding, others don’t have a clue. I feel like if the Rays had suspected the winning bid for Hiroyuki Nakajima was going to be under $5M, they might have thrown a hat into the ring.
The efficiency loss is due to two aspects of the the auction mechanism itself. First, a first-price sealed-bid auction does not induce bidders to reveal true valuations — it encourages bidders to bid lower than their true value.
Second, the ability of a bidder to unilaterally renege on the bid, by failing to come to an agreement on contract terms, probably undermines efficiency. This occurred with Hisashi Iwakuma and the Oakland A’s last year. We do not know if it was efficient for Iwakuma to remain in Japan. However, we probably want a system which prevents teams from making very high bids (in bad faith) in order to block players from coming to MLB.
Any modifications to the current posting system should address these two issues. I would suggest a second price sealed bid auction: if a contract is not agreed upon by the posted player and the winning team, then move along to the 2nd highest bidder and the 3rd highest posting fee (again with the right of the NPB team to refuse).
There is no moral hazard problem and your discription of allocative inefficiency is incorrect.
I wasn’t clear in my 3rd paragraph above. Sorry. This should be a bit clearer:
Any modifications to the current posting system should address these two issues. I would suggest a second price sealed bid auction. The winner pays the second highest price. In addition, if a contract is not agreed upon by the posted player and the winning team, then move along to the 2nd highest bidder and the 3rd highest posting fee (again with the right of the NPB team to refuse). Keep going down until the bidder list, until there is a contract or a refusal by the posting team.
“Some teams get the feel for what other teams are bidding, others don’t have a clue.”
Of all teams who “don’t have a clue”, the Rays are the last team I would expect to fall into this category.
If the Rays valued Nakajima above $5m then why did they not bid above $5m? Can you explain the transaction cost (or other market inefficiency) which would prevent a team bidding close to their valuation of the player?
How would it hurt the Rays to put a random lowball bid in for Nakajima in the hopes that nobody else was interested? If I’m a team looking at all at Japan, I put in a bid that makes sense to me (regardless of whether or not I think it will win) on the off chance that nobody else even tries – which is what the Yanks did, and it paid off big time. If it doesn’t get accepted, no harm done.
As pointed out below (by Barkey Walker) — I’m a dummy. A giant dummy. I really wish I could edit or delete my post, so my stupidity isn’t preserved for all eternity.
I still find the NPB-MLB posting system to be quite bizarre. The NPB team would get some surplus from their player. The MLB teams are bidding on the ability to negotiate with that player (sort of). At the point the bid is made, the MLB team doesn’t know what that surplus is — because the contract is unknown (and so is the player’s value, but that’s not a big deal). Since the posting fee is refundable (if no contract is reached), the MLB team must be obtaining some surplus value in the contract.
Why not just skip the posting fee part, i.e. allow direct contract negotiation with the player with all teams, then whichever team player x signs owes the NPB team x% of the contract? With posting, we get competition for the right to negotiate, then lots of conspiracy theories after the incentive to offer megabucks disappears. If it was a % system (sliding or not sliding, per Mr. Boras’s suggestion), it seems logical that the contracts would be more bloated and NPB teams would still collect large sums. While the % owed the team probably ought not be the 50% posting fee vs. contract relationship seen with Daisuke, it would still be considerable incentive for NPB teams to let their players leave while settling the problem of (alleged) bad faith market manipulation. Right?
1,000 times yes.
Or leave things as is with an extra clause in the process. The player always has the option of accepting a 3 year year deal valued identically to the posting fee.
IE, if you are willing to bid $30M for a player, you had better be prepared to pay him $30M over three years, since he’d have the option to just take that.
This would almost certainly bring down the posting fees a bit, while also increasing the chances that the player does sign and his former team gets their $$$.
I don’t see the problem here. 99% of the time the desired outcome is reached. Thats pretty efficient. The MLB is getting the player at below market value, the NPB is getting millions, and the player is able to enter the market.
There obviously isnt flagrant gaming of the system since there is only 1 example of a contract not being reached, and even then the NPB team are empowered to select the next lower bid if its from a team more likely to consumate a contract with the player… what exactly is the problem we are solving?
and even if you conclude that this needs fixing… how would you incent NPB to be party to it when clearly they benefit most in the current arrangement.
That’s the problem isn’t it, when you try to analyze market efficiency without figuring in all the parties to the deal?
There is no inefficiency to first-price sealed-bid auctions. Teams realize the problem that you noted in this article and systematically underbid. In fact, there is a rather nifty proof that the expected revenue is equal under a first-price sealed-bit auction and a second-price sealed-big auction.
There are some appealing aspects to second-price auctions, but efficiency is not one of them.
“and even then the NPB team are empowered to select the next lower bid if its from a team more likely to consumate a contract with the player”
I’ve seen that posted here before, but was never able to find a confirmation from a reliable source. Wikipedia says that MLB gets the bids and submits the highest only to NPB
I stand corrected… good article here from BP on the system and its evolution:
http://www.baseballprospectus.com/article.php?articleid=13870
Does anyone know if any Japanese players have ever tried to negotiate directly with an MLB team? To try to break the system from the inside out, so to speak?
Not that I know of. The only one in recent memory was Jyunichi Tazawa who was projected to be drafted high from the Industrial Leagues (he played for ENEOS) but instead decided to tell the teams that he was going to play in the US. If I’m also not mistaken, in doing so the NPB retaliated by implementing a rule saying that any amateur player that goes overseas without going through the NPB would be black-listed for 2 years (HS players), 3 years (college, industrial leagues) from coming back to the NPB should their excursion end in failure.
Otherwise, players out of respect wait to get posted, or achieve international FA (like Iwakuma Hisashi has now reached).
I posted this above – but BP has a great 3 part series on the evolution of the posting process:
http://www.baseballprospectus.com/article.php?articleid=13555
http://www.baseballprospectus.com/article.php?articleid=13870
http://www.baseballprospectus.com/article.php?articleid=15079
The problem that the posting system tries to solve is the matter of FA compensation, which exists both within MLB and within NPB, however not between MLB and NPB.
Since NPB offers a decent salary, the situation is different for players from any other league (maybe except Korea to a lesser extent) when moving to the majors.
International transfer system a la soccer sounds like the best option as it is a proven efficient system. But NPB still has too much pride (much like the KHL against the NHL) which is understandable because NPB and KHL both represent the highest level of play apart from MLB and NHL, but not quite that high. So some massaging is required to get around the pride issue since we’re dealing with human beings and significant sums of money.
In my opinion all winning bids this year would have been higher in an open bidding process.
The winning bid for Nakajima and Aoki were pretty much a joke. And there could have been a Jays-Rangers bidding war over Darvish.
And actually game theory backs that up – just read: http://en.wikipedia.org/wiki/First-price_sealed-bid_auctions
So actually Japanese teams are losing money (e.g. the Rakuten Eagles who will get zip for Iwakuma) and MLB get talent cheaper than they would in an open bidding process.
Wow that Soriano link was great, never knew that. Thanks Bradley.
I have contended on BTF that the players have to be getting a portion of the posting fee as a kickback, otherwise they are incented to work around the system more. I’ve said the players should make their contract demands known up front, so that bidding teams can tailor their bids with the contract costs in mind.
In Darvish’s example, it’s my understanding that if he doesn’t reach agreement with the Rangers he can come to the U.S. as a free agent in 2 years. During those two years he’ll make at least $7M per year in Japan. If the Rangers offer Yu a $50M/7 year deal, he’s going to make more per year in Japan, with less security. But the kicker is if he waits the 2 years, avoids injury/decline, he should be in line for a 7 year $100M deal, or more, given he’ll have multiple bidders.
So his risk really isn’t that great. He’s almost a lock to make $15-$20M in two years by staying in Japan, and likely to get a much longer, much richer contract in free agency. The extra $30-$35M in guaranteed money isn’t offering him that much utility, esp. when free agency also allows him the valuable and important utility of picking his destination.
So if players aren’t getting a kickback from the posting fee, it seems more would fail to reach agreement. But few of the big names have, so I find it likely that Yu is getting at least 20-30% of the Ranger’s fee “under the table” to ensure he’s happy signing a below market deal with the Rangers.
Otherwise his Japanese team is out a huge amount of money, and has very limited leverage over Yu. They can threaten to bench/demote him, but then they lose his highly valuable services, which are obviously worth at least $7M+ per year to them. So it makes sense they would grease the wheels with Yu by sharing some of their windfall.
does anyone know if NPB players are eligible to join the MLBPA?