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.