RISK PREFERENCES AND WAGE DETERMINATION IN THE MAJOR LEAGUE BASEBALL LABOR MARKET

Abstract

There have been few empirical analyses of firms’ risk preferences with respect to labor, largely because the necessary information is not available in many industries. In this study, a model of salary determination in Major League Baseball is developed and used to measure the risk preferences of employers. Using a sample of 1,599 contracts signed from 1993 to 2012, MLB teams are found to be risk-seeking in labor, but only for short-term contracts; in contracts spanning more than one year, teams show no significant risk preference. This pattern is consistent with a new theory of wage determination, in which firms prefer risky workers while risky workers prefer long-term income security.