Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options

Abstract

We study contracts negotiated between professional baseball players and teams to investigate the use of real options in a commercial setting. Baseball contracts feature options in diverse forms, and we find that these options have significant effects on player compensation. As predicted by theory, players receive higher guaranteed compensation when they allow teams to take options on their future services, and lower salaries when they bargain for options to extend their own contracts. The apparent value of options decreases as a function of the "spread" between option exercise price and annual salary and increases as a function of the time until exercise. Implied volatility of the options lies within the range found for other assets.