Average Salary and Contract Length in Major League Baseball: When Do They Diverge

This paper investigates the ways that various measures of player performance have different impacts on the outcomes of salary determination and contract length in Major League Baseball using contract data from 2002. Because average salary and contract length are jointly determined, a two-stage least squares is used to estimate each as a function of the other and various performance metrics. The results show two primary areas of divergence for contract length and average salary. The first comes from young improving players who are likely to get long-term contracts at low annual salaries. The second comes from players with chronic injuries, whose salary is not affected by their injuries but who will tend to get shorter contracts than they otherwise would. This second effect was not apparent from the first-stage regression, demonstrating the importance of the two-stage least squares methodology for analyzing contract length and average salary. * I would like to thank my adviser Roger Noll for his valuable advice and guidance throughout this process. I woul