The Economics of Rasmus

The Baseball Economist, JC Bradbury, had an interesting blog post last month that relates to what the Cardinals have been trying to do lately with contract negotiations. JC talks about the Tampa Bay Rays' deal with star prospect and now major leaguer Evan Longoria, which was offered to him just a few at-bats into his first major league season. The deal is worth $17.5 million over six years, including team options for three more years. The first option would pay $7.5 million in the seventh year of the contract and the second option covers both the eighth and ninth season for $11 and $11.5 million, respectively.

JC acknowledges that the deal works both ways - the Rays primarily get the options but also buy-out the arbitration-eligible years Evan would have merited, and Evan gets financial stability for the rest of his life, even if he never pans out as a major league player. The deal would seem to be a no-brainer for Longoria, who had a sub-par year with the Rays Triple-A affiliate (hmm... sound familiar?) and now can earn a substantial amount of money in his first years that typically would be worth less than $500,000. What does the Baseball Economist have to say of the deal?

By taking advantage of players’ risk aversion, teams can sign several players for less than their expected value and come out ahead in the long run. For example, assume we have two players who are expected to be worth $10 million/year for five years (total salaries of $100 million). Let’s say that one player ends up being worth $5 million/year, while the other is worth $15 million/year, the team still ends up getting $100 million in value. However, this is not where the big savings come in. Had the team gone year-to-year with the players, paying each of them their exact annual worth, the team does not save any money. Because players are willing to trade income for financial security, teams can sign players for less than their expected value. Therefore, the team in our example ought to be able to sign the players for less than $10 million per year each.

By signing Longoria to a deal now, the Rays can take advantage of club options that will likely be less than Evan's true value seven years from now. Considering Ryan Howard's big arbitration victory in his first year of eligibility ($10 million), the Rays may have avoided paying a higher salary on a year-by-year basis for Evan. Of course, there's risk involved signing a player so early, but, as JC explains, you prepare for it by evaluating the player's potential and diversifying your roster with contracts. Based on Longoria's highly-touted prospect status, I don't think the Rays expect Evan to tank any time soon.

What does this have to do with the Cardinals? The Cards have been proactive lately in signing their young players to avoid arbitration. Adam Wainwright's last arbitration-ineligible year was bought out this year with a $15 million deal for four years, including options for two more years. Yadier Molina sold his arbitration-eligible years for a 4-year, $15.5 million contract with a $7 million club option in the fifth year.

It's not out of the question to approach Colby Rasmus, our own star prospect, with the same type of deal the Rays gave to Evan Longoria. We know he'll be at least a passable major league player, with a high likelihood to play at an above-average level. The Cardinals need to look at a possible deal in light of what Ryan Howard got in arbitration and how much Colby could possibly ask for in a contract after his third year in the majors, when he would become arbitration-eligible. Interestingly, the Indians took the Longoria route with the player Colby is often compared to - Grady Sizemore - by signing him to a 6-year, $23.45 million contract after Grady's first year in the majors, with a club option for the seventh year.

There was some complaining from Cardinal Nation when the Cards signed Adam Wainwright to his four-year deal, but this is a strategy that could pay off on a long-term scale. Signing Colby Rasmus in his first year could actually be very cost-effective, and signing him after his first year would alleviate some risk but also drive up the price a little as the discrepancy between Sizemore and Longoria's contract shows. The Cardinals have not had a prospect as highly touted as Colby Rasmus come through the pipeline in quite some time, so this is a uncharted water, especially with John Mozeliak at the helm. Assuming Colby breaks free of his slump and retains his top-prospect status, taking a long-term approach to his contract would assure Colby's presence with the Cards for quite a while, give him financial stability, and save us money. Everybody wins.

By the way, I highly recommend The Baseball Economist by JC Bradbury. Makes for a great and interesting read!