Why the Twins got so little for Johan Santana

Say I call you up tonight and offer you a wonderful car--a loaded, new BMW that was once owned by Tom Hanks, your family's favorite movie star. And then I say that what I'm really offering you is the chance to buy that car from a dealer. Oh, and that I've already told your family that you're giving them that exact car for Christmas. And I told the dealer how much you all adore Tom Hanks. Think how much stuff you'd want to give me in return for the favor I've done you.

That's why the Twins got such a crappy package for Johan Santana.

On his podcast last week, Bill Simmons (this blog's eponymous Sports Guy) proposed that the Minnesota Twins' general manager had done so poorly in trading Johan Santana that he should be fired. This got me thinking about the kinds of value that were involved in the Santana trade, and my thoughts helped me understand how the Twins might have received so little in return for such a terrific player.

Every sports analyst I've heard is talking about the Santana trade as a gift to the Mets, a deal in which the Twins received 60 or 40 or even a very few pennies on the dollar. This view comes from what seems like common sense: the Twins traded one of baseball's best players and received nobody who appears likely to become anywhere close to as good as Santana. I accept that assessment of the quality of the players involved.

But this is the crucial fact of the trade: the Mets didn't exactly trade for Santana. They traded for a brief window of time in which they could negotiate a contract that would persuade Santana to waive his no-trade clause. The negotiations did not involve the competitive bidding of free agency, but the lack of competing bids arguably made the Mets' position weaker: they could not withdraw gracefully after being outbid, as they could after making an offer to a free agent. Instead, they faced a situation in which every observer I know of thought they absolutely had to sign Santana to consummate the deal and thereby avoid the insupportably embarrassing circumstance of appearing to steal Santana from the Twins and then give him back.

In other words, the trade gave Santana overwhelming strength in the negotiation, to the extent that he could easily force the Mets to pay as much or more than Santana would have received as a free agent.

And reader, the right to pay market value or more for a commodity is simply not worth very much. Santana now has a gargantuan contract; he may be the best pitcher in baseball, but he is now also the highest-paid pitcher by a fair margin. Given legitimate questions about his health and his poor performance at the end of last season, Santana does indeed seem to have benefited from his extraordinary leverage in negotiating with the Mets.

The Mets, therefore, traded four prospects of some value in order to overpay a player. The Twins received not only the prospects but many millions of dollars. They would have paid Santana more than $13 million in 2008; his replacement will make vastly less, and the lost ticket revenue will--unfortunately--be balanced by the income the Twins will receive from the perversely structured revenue sharing agreement. I'll guess that the total savings comes to about $8 million, but I welcome refinement of the estimate.

Therefore, instead of thinking about the quality of the players alone, we can think instead of the stuff each team actually received.

The Mets received a terrific player but one with (at least) a fully valued contract.

The Twins received four prospects and maybe eight million bucks.

The only reason for a team to give up substantial value for Santana would have been defensive: a team could reason that Santana's value was literally incomparable because he so thoroughly outclassed players available by trade or free agency, so even above-market compensation made sense if it meant blocking anyone else from gaining a uniquely desirable asset. This is the Yankees-Red Sox scenario, in which either time could have overpaid to block the other from acquiring Santana--just as both were willing to overpay for the rights to negotiate with Daisuke Matsuzaka. Matsuzaka's case was, in fact, much more closely analogous to Santana's in economic terms than more apparently similar trades such as that of Erik Bedard, who had no negotiating power with his new team.

If the Yankees and Red Sox did not view Santana as a singularly market-altering property, or if each team simply realized that the other was not seriously pursuing Santana, the Twins were left with almost no trade leverage. Their weakness seems surprising given Santana's raw value as a player, but in economic terms, the Twins had very little to offer another team. Having little to offer, they received little in return.

Addendum: The Twins appear to be using the money they've saved to piddle away millions on medium-sized contracts for replaceable players. If they want to know how that will work out, they might investigate the track record of the 1990s Pirates.

Fixing revenue sharing

Michael "not the Moneyball guy" Lewis has a column in the New York Times proposing a reform for revenue sharing that would punish teams for lazy freeloading. Such a reform seems essential to me: the free rider problem has become grotesque in some cases, and not just in baseball. I wish Lewis painted the problem a little more vividly, and it's hard to tell whether his formula gets a solution exactly right, but he certainly seems to be talking sense. I hope many more writers join in the conversation.

The power of Scott Boras

OK, one more post roughly related to Alex Rodriguez and his contract--

Tyler Cowen at Marginal Revolution wonders how Scott Boras might be able to command higher prices for his clients than other agents do. J. C. Bradbury is skeptical of this power. Such skepticism is to be expected from economists, who would be surprised to see a single actor fundamentally change the dynamics of a competitive market as Boras is supposed to do, but I don't think you can seriously dispute that Boras has fundamentally shifted prices at times, especially in the amateur draft.

Cowen lists some mechanisms by which Boras might beat his market, but he neglects what I consider the most interesting possibility: that Boras actually makes his players better. This recent story in ESPN the Magazine describes the ways in which Boras tries to increase the skill and durability of his players. An ability to increase durability seems plausible to me, and if it seems plausible to owners, it may well cause them to pay more for Boras's clients. In the case of A-Rod, durability is a crucial factor, arguably the crucial factor, even a decisive one: if he stays healthy, he will almost certainly become the home run king. I can easily imagine Boras's longtime management of Rodriguez's training regimen being worth millions of dollars to a team.

A-Rod's Contract Again

I usually agree with Rob Neyer, but I don't agree with this blog post, where Neyer contends that Alex Rodriguez isn't worth the money he's now earning or will earn. As evidence that A-Rod is overpaid, Neyer cites Nate Silver's study of the first years of A-Rod's present contract.

I see three problems with Neyer's case.

First, and most trivially, Neyer cites the contracts of Rodriguez, Mike Hampton, and Manny Ramirez as regrettable decisions by irrational owners: "All three franchises, within just a few years, regretted those deals. Terribly regretted those deals." Sure, Hampton's deal was a disaster, but doesn't it seem a little nuts to criticize Boston for the Ramirez deal in the very week that the team wins its second World Series? I mean, I discount the meaning of postseason performance as much as anyone, but it's hard right now to imagine a better way for Boston to have spent that cash.

Second, the Neyer/Silver argument may be outdated. Neyer doesn't account for the increasing revenues in MLB. The increases may not be enough to change the big picture, but they need to be accounted for.

But the more fundamental problem with Neyer's argument is that he's making a case about a market that simply doesn't exist. Baseball owners don't get to sign free agents on the basis of Silver's calculations of their value. The asking price of free agents is (give or take) the amount of the richest competing offer plus a little bit. In such a market, top free agents will always and necessarily command more than their demonstrable value, while top young players in the present salary structure receive less. The owner who offers the Silver-Neyer price for free agents simply won't sign any of them. The rational price is above the median assessment of a player's demonstrable value. That is, the right price is what Neyer would wrongly call an irrational one.

The interesting quirk of this situation, however, is A-Rod's act of opting out of his present contract, which costs the Yankees $23 million. Avoiding that loss should be worth a lot to the Yankees; they could rationally pay, say, $20 million more than A-Rod's free agent price to extend him. The fact that A-Rod appears to be turning down a contract extension means a) he's bluffing, b) he really doesn't want to play for the Yankees anymore, or c) he and the Yankees are each betting on evaluating the free agent market better than the other. I'm guessing A-Rod wins that bet.

Undefeated seasons and aligning incentives

The Sports Guy has written recently about the relative probabilities of going undefeated in the NFL and in a given fantasy football league. Simmons skips the obvious historical approach--getting the a fantasy stats service to tell him how many teams go undefeated and comparing the incidence with the NFL's history--but he offers good reasons for thinking the undefeated fantasy season the rarer achievement. I'll add a couple of thoughts about the role of incentives in the comparison.

Many of Simmons's points boil down to the simple fact that fantasy results are hard to control due to misaligned incentives. If the Patriots are winning by three touchdowns and your fantasy team needs Tom Brady to through for two more, you're out of luck because Brady doesn't care what you need. His incentives are different from yours. Incidentally, this scenario demonstrates why I think fantasy baseball is a better pretend sport than fantasy football: in baseball, Manny Ramirez is going to try to hit well whenever he comes to the plate. His incentives are aligned with his fantasy owners' because there's no way to run out a clock.

(Side note: the latest Nobel prize in economics was awarded for work on mechanism designs that maximize incentive alignments. Here is one explanation of the work.)

OK, so the point is that misaligned incentives make fantasy football tougher to control. But there's also a contrary influence of incentives. In most fantasy football leagues, every team is trying to win a given year's championship. In the NFL, some teams are trying to win the Superbowl, but many of them are looking at least partly to the future, some are in full rebuilding mode, and a few are coasting along on low salaries to soak up guaranteed profits through revenue sharing. Therefore, the NFL is guaranteed to have unbalanced resources, with a handful of really good teams standing in the way of any undefeated season. It would be much easier to sweep a league that disbanded every team each year.

How do these variously misaligned incentives shake out to answer Simmons's question? I don't know. I'd love to see some data.