Elite free agents do not sign at their fair value.
The St. Louis Cardinals are not the only team who thinks twice before committing nine figures and a decade to a player. Teams do not want to tie up that much capital and risk in one player. To figure out how much a player like Machado will be paid relative to his fair free agent value, I’ve analyze how teams have executed similar deals in the past.
To determine how much teams hedge against the risk inherent in huge contracts, I compiled a comp set of players who have signed monster deals since 2009. This set includes Jason Heyward, Giancarlo Stanton, Freddie Freeman, Joey Votto, Robinson Cano, Prince Fielder, Joe Mauer, Mark Teixeira, Buster Posey, Troy Tulowitzki, and Chris Davis.
To determine these players’ fair value through free agency (and, in some cases, arbitration), I started with the player’s WAR in their last season prior to signing the new contract. I then applied an average aging curve to get their annual expected value in WAR. I used $8.5M/WAR for 2017, then accounted for inflation in future seasons and deflation for prior years using a 5.5% rate.
Next, I calculated the average discount these players had to take in their long term contracts relative to their expected value over the contract life. To better demonstrate this process, I’ve included the calculation table for Jason Heyward’s contract with the Chicago Cubs below.
The average discount percentage among the eleven players was 17.7%. In other words, on average, these players were paid 82.3% of their expected free agent value over the life of their contract. Prince Fielder and Robinson Cano were dramatically overpaid in their deals. In fact, both were paid a large premium over their projected free agent value, which skews the average discount percentage.
Taking out their contracts, in addition to the two contracts with the highest discounts, the average discount for the remaining seven players jumps to 28.5%. I will reference both of these numbers when projecting the free agent deals for Manny Machado and Josh Donaldson.