New Stadiums and Player Contracts

If you ever wondered about how sports teams and players account for potential new stadiums in player salaries, they do so in the contracts the players sign. In doing some research on this year’s crop of baseball free agents, I ran across this little ditty about Florida’s Mike Lowell contract.

Mike signed a $32 million, 4-year deal with the Fish before the 2004 season. The contract contained a clause saying that if no new stadium deal were in place by 10/31/2004, the final two years (2006 and 2007) of the contract would be voided and Mike would have an option for 2005.

This clause protects the Marlins from having to pay Mike more than his marginal value from playing in Joe Robbie Stadium. It protects Mike from having to become a free agent in 2006. If he becomes a free agent then, he probably won’t be playing for the Marlins (he wants to stay) and his expected marginal value for those years could be much lower than it is today. In other words, it’s basically a risk-sharing clause.

Mike’s new deal guarantees that he’ll receive the remaining $25.5 million left on his old contract. Why were Mike and the Marlins willing to sign this guarantee? Well, some new information has come out since the time the original contract was signed. Quote from the article:

“Florida has made strides toward securing that new ballpark, a 38,000-seat, retractable-roof facility that would be built adjacent to downtown Miami's Orange Bowl … at an estimated cost of $420 million. And like the team, Lowell is confident that a deal is on the way.”

Seems that Bayesian updating is at work in the baseball players’ labor market.