Firm Behavior under Conditions of Final Offer Arbitration: An Empirical Analysis of Major League Baseball's Salary Negotiation Structure

This paper explores the use of final offer interest arbitration (FOA) in Major League Baseball (MLB) and whether arbitrated salaries differ meaningfully from private settlements. MLB provides an excellent environment to analyze FOA because it is common practice for eligible players and their teams to announce official intended arbitration figures well in advance of hearings but ultimately privately negotiate a contract in the interim. This allows for consideration of the bounded arbitrated salary environment even when a hearing is avoided. Results reaffirm the findings of Burgess and Marburger (1993), which suggested that arbitrated salaries are of “low quality” in that the distribution range is wider for arbitration compared to private negotiation. Second, this paper contributes to existing literature by expanding analysis to including quantile regression, which indicates that not only is contract length positively correlated with players’ salaries but also statistically significant differences in this effect exist throughout the distribution.