How Game Theory Explains Int'l Bonuses

Kiley explains how game theory drove the timing of the Yankees' big plans & the international amateur market in general.

After some conversations with readers, I realized there was another part of the machinations of the international market that needed some explaining. For more context, see the original article about the Yankees' international plans.

Why Now, Why International, Why Not Earlier?

The common refrain to this article with fans of the Yankees (or any other club) was wondering why a club didn't do this earlier, why a club didn't do it before there were international spending limits (or less harsh penalties) and why a club didn't do this in the draft.

For the Yankees (and most other clubs), there is a status quo with the allocation of their funds for player acquisitions between the big league club, the draft and international free agency. For the Yankees under Hal Steinbrenner, it was the big league team first, profits second, then amateur spending third (provided the system is strong). The draft and international departments got average to slightly above average budgets to work with, enough that they didn't have a reason to complain about not having enough resources.

With the big league payroll and profits locked into a good position for 2014 due to the payroll cuts to get under the luxury tax and the farm system in worse shape than it's been in awhile, the amateur departments were due for some extra money, though maybe only for this year. The draft penalties are too tough for the Yankees to deal with, as crushing the spending limits in that market would cause a loss of future first round picks (which limits access to the top players) and they already pick low enough/lose picks for free agent compensation that it was too much of a penalty to bear.

The international spending penalties are only monetary and you have a near unlimited upside to your ROI this year as you have access to every player on the market, something the draft can never offer. The fact that the domestic draft is locked into this system (or something like it) but an international draft could be coming and this international strategy likely soon disappears is the cherry on top. In a simplistic sense, that's why all of this happened the way it did.

The Game Theory Angle

Why it hadn't happened before can be explained with a popular game theory scenario: the tragedy of the commons. When I worked for a club in their international department, one of my first questions was the question many readers are asking: if the ROI on amateur spending is so much higher than big league free agency, why not just blow every other team away in this area? The answer was always some form of, "because if we do that, then no one ever gets to do it again."

The tragedy of the commons is essentially about conserving resources. If each hunter acted rationally, they would all maximize the amount of prey they killed each day and eventually extinguish the resource that keeps them alive. So, hunters are forced to act for the best of the collective of hunters and kill only what is needed, or else they won't have anything to hunt/eat in the future.

It's not a coincidence that the instances of breaking records/spending guidelines in international bonuses came when the rules either were set to change or could change at any minute. If the Rangers did spent $15 million in 2001 instead of 2011, the fear clubs had is that MLB would be forced to spring into action and make international spending limits as soon as possible. As long as the system was open, every club had access to every player and were free to double or triple their budgets at will, with an unspoken cap around $7-10 million that some clubs scraped up against every year. Every club got to do what they wanted, but once someone acted selfishly, the game would be over.

So, once the rules were scheduled to be changed, there was nothing to lose as the consequences were gone--the spending limits were coming regardless of what clubs did. So, the Rangers acted rationally and spent big, likely borrowing from their 2012 international budget and maximizing their haul. As MLB laid all the groundwork for an international draft in the new rules, it didn't matter if they announced it was coming in 2015 or if it hung over clubs' head like the Sword of Damocles: either way, the consequences were removed once again. So the Rangers spent big again in 2013, borrowing from future years again. Texas is the only club acting completely rationally, though some clubs may not have enough revenue to exploit this strategy to the same degree.

What This All Means

The reason why the international system is broken right now is because the consequences are removed until the international draft is instituted. The Yankees are simply recognizing this at the same time that other conditions within the organization lined up to make 2014 the right time for them to execute the plan. If there are truly no consequences, then whoever has the biggest war chest stands to make the most profit.

The Yankees are leveraging their league-leading revenues into this strategy so they would stand to profit more than any other club under the new rules. Or, as its also known, Bud Selig's worst nightmare. This might speed up the timetable for the international draft, but it likely would've come within three years anyway, so the Yankees only had one shot to do this.

Now, they just have to pick the right players.

Follow Kiley McDaniel on Twitter for more baseball news. He'll be in the Dominican Republic in January scouting the top players for the July 2nd signing period.

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