Contract Options and Performance: The Case of Major League Baseball

Abstract

This study looks to understand whether the inclusion of optional years on Major League Baseball player contracts impacts player performance. Contract options are a feature included in about 13% of new contracts given to batters from the years 2009 to 2017. There are four common types of option: club, mutual, player, and vesting. How an option affects incentives for player effort will likely depend on the type of option. It is likely that effort will be disincentivized when the team has the final decision on whether to exercise the option. This prediction is tested empirically. The results suggest that having a club or vesting option leads to diminished performance by players.