Labor Market Inefficiency in Major League Baseball

It is our intention to show that major league baseball general managers, caught in tradition, reward hitters in a manner not reflecting the relative importance of two measures of producing offense:  on-base percentage and slugging.  In particular, slugging is overcompensated relative to its contribution to scoring runs.  This causes an inefficiency in run production as runs (and wins) could be produced at a lower cost. We first estimate a team run production model to determine the relative weights of team on-base percentage and team slugging.  Next we estimate a player salary model to determine the weights given to these same two statistics.  Using ratios we find that slugging is overcompensated relative to on-base percentage, i.e., sluggers are paid more than their worth in terms of contributing to team runs.  These results suggest that, if run production is your objective as you acquire talent for team rosters, more attention should be paid to players with high on-base percentage and less attention to players with high slugging percentage.  In addition, the popular practice of adding on-base percentage and slugging percentage to determine a single performance statistic (called OPS for on-base plus slugging) should be modified to give more weight to on-base percentage.