The Economics of A-Rod, Part 2

Why is it that the best place to find high-level microeconomic analysis in the NYT seems to be the sports section? First there was Ed Wyatt on Tour de France breakaways; now comes Columbia's Jeffrey Gordon on the A-Rod opt-out. Gordon transcends Leitch-level analysis (which I was very happy with) and takes the game theory of baseball negotiations to a whole new level, explaining why A-Rod might well end up getting more money out of the Yankees if they don't have a $29 million subsidy from the Texas Rangers. His headline says it all: "By Opting Out, Rodriguez Really Wants In".

Gordon looks at the $29 million subsidy in an interesting way: as a bargaining chip being used by the Yankees to keep Rodriguez from defecting elsewhere. By opting out of his contract, Rodriguez takes that chip away from the Yankees, and forces them to get serious about retaining him.

In Gordon's view, Rodriguez opted out of his contract very early on, before the Yankees made him a serious offer, because he actually wanted to stay at the Yankees. It sounds weird, but Rodriguez, on this view, opted out in order to avoid putting the Yankees into an impossible position. If he opted out after a serious Yankees offer, there would be no way he could return to pinstripes. And without Rodriguez opting out, the Yankees were very unlikely to offer the kind of money that Scott Boras thought Rodriguez was worth. So the only way that Rodriguez could get a fully-valued offer from the Yankees was to opt out very early on in the negotiation process.

Now Gordon does concede that spiteful and self-defeating behavior by the Steinbrenner sons could scupper this strategy. And from a public-perception point of view, Rodriguez has been damaged: this is very important, since in the world of sponsorships and endorsements, public perception is a valuable, fungible and monetizable commodity. The amounts of money involved seem to have turned even Portfolio's sports blogger into a latter-day Marxian, asking "how much money does one person need?", with the implication that it's somehow déclassé to ask for lots of money if your team failed to meet expectations.

Interestingly, Gordon's analysis did seem to move the market, a little. In the immediate wake of the A-Rod opt-out, the probability of his starting the 2008 season as a Yankee, according to Tradesports, dropped to as low as 2%. After Gordon's article appeared, the Tradesports contract rose, and it's now up to 10%. It's still much lower than the 50% or so at which the contract was trading before the opt-out was triggered, but it's now clearly non-negligible. All the same, if you really buy Gordon's analysis, the contract is a screaming buy – or would be, if there was any liquidity in it, which there isn't.