Pitching, Risk Aversion, Salaries

Lincecum and Arbitration

Tim Lincecum is currently in his first year of arbitration with the Giants (If you don’t know what arbitration is, look at this post). In a short synopsis, it is speculated Lincecum will file for anywhere between $8 and $24 million for his one year contract. How it works is that Lincecum has to file what he believes he should get as salary, and the Giants can either accept the offer, or offer him something else (which is usually  a lower salary). What’s important to note is both numbers will correlate as to what each side believes Timmy is going to be worth for the 2010 season. if both sides can’t agree to a salary, they both go to court and argue their sides for a correct amount.

What’s cool is that Lincecum has a lot of space to work with, as to what will actually be granted to him through this process. If he asks for way too much (like upwards of $24 million), then the Giants could get a huge discount (say $12 million) if the court sides with the Giants. However, if he asks for what is probably his worth (say $18 million), he’s probably leaving a couple million dollars on the table. So it’s an interesting game theory model in which both sides must also think about what the other will do in certain situations, the interdependency of choice. What’s best for both sides is coordination, yet the uncertainty of what the other will do causes conflict and may result in giving Lincecum either more or less of his true worth.

Here’s a good summary of the figures, taken from an article in Baseball Prospectus yesterday:

I think Lincecum will win $18 million, hands down, but that’s a different question as to what he should offer. The arbitration panel picks the offer (the team’s or the player’s) that they believe to be most correct. If the Giants propose $12 million and Lincecum goes $18, Lincecum wins. But, he also could win if he goes as high as $24! To suggest $18 million would be to leave possibly $6 million on the table. Now, I don’t think the Giants will go that low—they will go under $18 though—so, I wouldn’t recommend $24 million, but I think Lincecum will ask for more than $18. How much more has to do with factors that I know nothing about. Have the parties discussed figures for a long-run contract? I suspect they both know something about what the other party might offer.

It’s the same exact negotiations any business goes through in evaluating promotions and raises. What’s more important, the number of years serviced to the firm, or how much the employee has increased revenue in the past, even if it has only been one or two years.

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