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Dave Cameron certainly thinks so, but I’m not so sure.

Dave is making a lot of good points, and there are many aspects of the system that could be improved. But he’s not taking into account the actual reason the system was put in place to begin with. Here are the reasons he lists:

Goal #1: Promote parity by allowing teams to recoup talent lost when big market teams steal their players

Goal #2: Provide a disincentive for teams to sign free agents away from other clubs, making it more likely for players to stay with their original franchise.

In reality, though, free agent compensation exists for only one simple reason: to increase the costs of signing another team’s player, therefore driving down free agent salaries (at least in theory).

This was once a huge issue in collective bargaining, as it was the primary reason for the 1981 strike. The owners wanted a system where the team losing a player would be able to pick a player from the signing team’s roster (the signing team would be able to protect a certain portion of its roster). From Wikipedia:

On July 31, 1981, a compromise was reached. In the settlement, teams that lost a “premium” free agent could be compensated by drawing from a pool of players left unprotected from all of the clubs rather than just the signing club. Players agree to restricting free agency to players with six or more years of major league service. [2] The settlement gave the owners a limited victory on the compensation issue.

That system eventually became what we have today, where the signing team gives up their top draft pick, unless it is in the top 15 overall picks.

So, here are the basic economics. If each draft pick represents a surplus for the drafting team, then the system should do what it’s supposed to. Let’s say the 18th pick in the draft will, on average, create a $2 million value surplus for his team (I’m making this number up, for the sake of this example; the actual number could be much higher or much lower). If a team signs a Type A free agent, it loses that pick, and the value that comes with it. If the free agent’s expected marginal revenue product (MRP) had been $8 million for the following season, the team should only be willing to pay $6 million for that production.

Is this how it plays out in practice? Honestly, I’m not sure. We’ve had cases like the Giants a few years back, who deliberately signed mediocre free agents (e.g. Michael Tucker) before the arbitration deadline in order to ditch their first round picks. Obviously, they felt that investing in the draft wasn’t a sound practice (although they’ve changed their stance since). There are also the Moneyball A’s, who had seven first round picks in 2002, and had to come up with creative solutions just to afford their signing bonuses.

So is the system broken? I don’t think it’s as black and white as Dave makes it out to be. There are certainly holes, including the ones he points out. And it certainly doesn’t have a massive effect on the free agent market, like a direct player-compensation system would. But it still should be a net gain for the owners (albeit a small one), and is therefore still serving its intended purpose.

Feedback? Write a comment, or e-mail the author at shawn(AT)squawkingbaseball.com

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