The spectacular salaries paid to various baseball stars—and the ongoing player-management acrimony over those salaries—leads one to question the relationship between performance and compensation during what may someday be referred to as the “golden era” of free agency. After reading the available work on the determinants of ballplayer compensation, one may still wonder what effect today's hit, strikeout, assist, or error exerts on tomorrow's salary—or, more colloquially, “How much is a home run worth?” The present study addresses these questions from the vantage point of a salary-updating model. This model assumes no salary cap and posits that, according to an updating or ratcheting process, future salary depends on current salary and current performance.
Morris B. Holbrook is with the Graduate School of Business, Columbia University, New York, NY 10027. Clifford J. Shultz, II is with the School of Management, Arizona State University West, Tempe, AZ 85281.