Implications of the Auction Mechanism in Baseball's Free Agent Draft

All trading activity requires communication between buyers and sellers. But nature of communication depends crucially upon institutional environment within which the market operates. For example, bids and sales acceptances for rare art, gold, used cars, and hamburgers emerge in very different trading environments. We do not submit sealed bids for hamburgers and we typically cannot find a standing fixed price for rare art. But since trading institutions differ, economists are naturally interested in efficiency properties of various mechanisms and in distribution of gains from trade generated in different trading environments. Recently, nature and efficiency consequences of particular auction mechanism for rationing supply to buyers has been studied for such plindustries as eedry bulk transportation on inland waterways [6], off-shore oil tract leasing [4], commercial airlines (resolving overbooking) [7], and others. This paper is a similar inquiry and concentrates upon an industry in which bidding environment for inputs is well articulated and has recently undergone a dramatic change: namely, Major League baseball.