PRODUCTIVITY AND INTEREST ARBITRATION IN MAJOR LEAGUE BASEBALL: 3 ESSAYS

Abstract

This dissertation consists of three essays exploring the labor market in Major League Baseball (MLB), as well as the negotiation environment for arbitration eligible players. Chapter 1 will show that the distribution of individual labor productivity has a significant effect on overall firm output. Results indicate that a firm with heterogeneous workers should consider not only the sum of individual contributions, but also how individual contributions are allocated, as increased concentration reduces overall output. Traditionally, salary dispersion acts as a proxy for ability dispersion. Past literature indicates that workers respond to disparity, though the literature is conflicting as to the direction of this response. In all cases, however, using salary as a proxy for worker production over-simplifies the firm's decision-making process. This chapter uses data from MLB to measure productivity concentration directly, independent of wage concentration. If workers act as complements to one another then the concentration of productivity will influence overall output in a way that is unrelated to the distribution of salaries. This analysis allows for workers’ behavioral response to wage, and the productivity effects of heterogeneous individual production levels, to be evaluated separately. The analysis could extend to any industry in which workers act as a team contributing a portion of a final product. These findings are particularly useful for industries, like MLB, in which varying degrees of monopsonistic power make wage a poor proxy for productivity.\\ Chapter 2 discusses Final Offer Interest Arbitration (FOA), a bargaining mechanism designed to promote private negotiation and, when necessary, resolve a negotiation impasse without a work stoppage. If parties cannot settle on mutually acceptable terms, they bring their proposed terms to an arbitrator. The arbitrator then rules in favor of one party. In a Final Offer system, the winning party's terms become the binding terms of the agreement. In order for FOA to be an effective mechanism, it should promote bargaining, meaning it is used relatively infrequently and, when used, its outcomes should resemble privately negotiated terms. Traditionally, both parties are given equal power to select the arbitrator who will hear the case. This veto power during the selection process should weed out any calculable or predicable favoring of one party over another, so an FOA system should not yield significantly different settlements from those that do not go to arbitration and are instead privately negotiated. This chapter explores the use of FOA in Major League Baseball. Different players face arbitration eligibility at points during their career, allowing for a side-by-side view of settlements with and without an FOA mechanism. Results indicate that FOA has succeeded in promoting bargaining, but that a bias against players lingers even as uncertainty dwindles. Chapter 3 is meant to complement chapter 2 by further exploring FOA. Arbitrators must maintain a degree of unpredictability in order to promote private negotiation. However, they also must be predictable enough that parties expect a "high-quality" ruling, meaning the outcome falls within a range that parties believe reflects privately negotiated decisions. I use data from Major League Baseball (MLB) and the Wisconsin Employment Relations Commission (WERC) to explore the way teams learn from past decisions to reduce uncertainty surrounding arbitrator decisions.