Friday, October 17, 2008

Trading Peavy: It's all About Excess Value

Today I received an email from a Padre fan upset about the possibility Jake Peavy may be traded. The letter began:

As you may have heard the Padres are actively, yes actively, shopping Jake Peavy and hope to find a suitor before free agency begins. I want to start off by saying that moving him would be stupid...period. There is no excuse, no way to justify it. Not "potential" injuries, not cost, not anything. A pitcher of his caliber is going for 20 mil/a year now (Santana and what Sabathia will get)...

This letter epitomizes a widespread misunderstanding about player value. Jake Peavy may very well be worth $20 million on the free agent market, but that does not mean he has more value than a player (or set of players) who would be worth $10 million as a free agent.

Peavy's true value to the team is the difference between his marginal revenue product and his salary. If we assume Jake Peavy is a $20 million pitcher, then (all else equal) he will generate an average of $5.25 million in surplus value for the Padres over the next 4 years. Just because this (highly limited) model predicts Peavy generates positive value for the Padres over a 4 year period does not mean the Padres should not explore a trade. Another team could offer a package of young players expected to generate $10 million dollars per season with a collective cost of $2 million per season. If the Padres were to accept this trade they would be better off. Instead of earning $5.25 million per year of profit, the Padres would be making profits of $8 million.

Of course, as fans, we are not interested in how much profit the team makes, but rather how well the team does. My example seems to suggest the Padres would neccesarily get worse, as they are losing $10 million per year in production. What I failed to mention was assuming the team maintains an even payroll, making this trade could be the first step toward improving the team.

Over the next 4 seasons, the Padres will pay Jake Peavy a non-discounted average of approximately $15 million. In my theoretical trade, the Padres take back $2 million per year in salary obligations. This leaves $13 million per season to spend on additional players. Assuming the Padres maintain an even payroll, the team will have replaced $20 million of production with $23 million of production (Note: there are enough replacement level players on the current roster such that their contributions can essentially be ignored). In addition to getting $3 million dollars better, the Padres will have also reduced their risk. This includes both the risk of injury, and the risk of poor performance.

Now, what if the Padres do reduce payroll. Should we as fans still support a trade of Jake Peavy? In short, yes. Lets assume the Padres are planning to reduce their current projected 2009 payroll by $15 million and do not want to trade Jake Peavy. Instead, the team decides to forego resigning Brian Giles ($6 million in savings), and Trevor Hoffman (estimated $5.5 million in savings), and trades Khalil Greene ($6.5 million). These players are replaced by cheap talent that costs (and is expected to produce) $3 million. It is likely Giles, Hoffman, and Greene will collectively be worth in 2009 at least the $21 million I project they will be paid. If so, by reducing costs in this manner, the Padres will have gotten at least $18 million worse.

By trading Peavy, the Padres will be able to reduce costs while also aquiring valuable assets. In my example, the Padres only get $10 million worse by trading Peavy, which is certainly better than $18 million worse. (Disclosure: I am going to go ahead and use the $15 million per year average, rather than the actual 2009 salary number. But, if you want, you can trade Greene as well, and the team still does better than in the previous example). I recognize there are other ways to reduce payroll than getting rid of Giles, Hoffman, and Greene, but the concept is the same: the Padres will be unlikely to get much back in return. Instead, the full effects of payroll reduction are likely to be felt on the field. If the Padres are able to acquire surplus value for Peavy, not only is ownership better off, but the fans are better off as well. This is the case regardless of whether the team cuts payroll.

In this post I have used somewhat arbitrary examples. The reason for this was not to somehow prove the Padres should trade Jake Peavy. That type of analysis must include concepts such as the variability of Peavy's value depending on the projected success of the team. Rather, I merely wanted to demonstrate (and I know I am in some cases preaching to the choir) that if the Padres are able to deal Peavy to a team that more highly values his services, they should do it. The team, and the fans will be better off because of it.


Kevin said...

Daniel would you consider writing something about no-trade clauses and why the Padres seem to give them away like candy. Its understandable why teams give them but is there a point when the value from trading a Nevin or a Giles exceeds the extra utility from paying them less due to a no-trade clause? Should the Padres consider maybe not always give them because obviously a player would rather have it in their contract.

Daniel Gettinger said...

Not surprisingly, I believe there is a place for the insertion of no-trade clauses into contracts. I will touch on it more later in the week.