Earnings equations are estimated for major league baseball hitters and pitchers using salary data for the 1989 season. The results indicate that final-offer salary arbitration and long-term contracts have a large positive impact on salaries. The impact of free-agency eligibility is also positive, but smaller man arbitration eligibility. This implies that some players have used the arbitration process to extract above-market salaries. Therefore it is concluded that it would be in the interest of the owners to replace arbitration with earlier eligibility for free agency.
Lawrence Hadley and Elizabeth Gustafson are with the Department of Economics and Finance, University of Dayton, Dayton, OH 45469-2240.