1. Methods Results Conclusion Introduction Research Question References
MLB RULE IV DRAFT: VALUING DRAFT PICK SLOTS Anthony Cacchione, MA Colin Powell School at the City College of New York
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Risks inherent in the MLB Rule IV Draft are worthwhile, as draft picks in the first 25 selections generate a NPV equivalent to an
average player’s salary on the open market.
Methods
Results
Conclusion
Introduction
Research Question #1: The first 5 picks in each draft constituted the first bucket of picks and generated a NPV of $28.1 million, which is equivalent to the yearly salary of some of the league’s top free agents. Acquiring enough surplus value through the draft can provide teams with the financial flexibility to pursue key free agents to complete their rosters.
Research Question #2: The figure above plots the NPV of each bucket and shows how quickly the draft picks lose value. The blue line shows a LOWESS regression to locally regress the data and better fit the non-linear relationship of the data.
The MLB Draft is a valuable process providing each team with talent that at a significant discount
However, it comes with the significant risk that the draftee will never reach the Major Leagues and reward his club.
Risk is worthwhile, as the production of players in the first 5 selections generated a NPV equal to an elite player’s salary.
First 25 picks provide NPV comparable to an average MLB player’s salary.
The value of draft picks quickly declines until the 116th selection
After the 116th pick, production levels off to an NPV in excess of $1.5 million.
As free agent prices continue to rise, the MLB Rule IV Draft will continue to be valuable for MLB organizations looking to remain in contention for many years.
Every season, Major League Baseball (MLB) organizations invest millions of dollars to identify and acquire the top amateur talent in the United States and Canada through the league’s Rule IV
Draft. The value of each draft pick is derived from his ability to provide value below the market value while he is under team control; however teams do not realize that value for multiple seasons. Previous research analyzed the Internal Rate of Return of each draft pick slot. This research calculated the Net Present Value (NPV) of each draft pick slot.
The data analyzed in this research includes each player drafted in the first 10 rounds of the drafts from for a sample of 2,944 players. This study analyzed the value each player provided based on their Wins Above Replacement (WAR) produced and the value of one unit of WAR on the free agent market. The draft picks were also grouped with neighboring picks in order to increase the sample size.
“CF” is the draftee’s WAR of each season multiplied by its value of $9 million per WAR on the free agent market
“d” signifies the 10% discount rate used to bring the draftee’s value worth to Present Value.
“t” represents how many years removed from the draft the performance occurred.
“VC” is the player’s salary while under team control and equals 31% of his market value.
“Sibo” is the draftee’s signing bonus.
Research Question
The aim of this research was to determine the value, in dollars, of each slot in the MLB Rule IV Draft. The following research questions were addressed:
What is the NPV of each slot in the MLB Rule IV Draft?
How quickly does the value of draft picks decline?
References
Burger, John D., and Stephen J. K Walters. “Uncertain Prospects.” Journal of Sports Economics, vol. 10, no. 5, 2009
“MLB Stats, Scores, History, & Records.” Baseball-Reference.com,