Free Agency, Competitive Balance, and Diminishing Returns to Pennant Contention

Abstract

This article argues that the 1976 introduction of free agency increased competitive balance in Major League Baseball. The evidence is based on a new empirical measure that captures the key dynamic element of balance: year‐to‐year fluctuations in team performance. My hypothesis is that diminishing returns to each additional year's “production” of a pennant‐contending team reduces the incentive to bid continually for top players. Free agency allows talent to be reallocated more readily to potential new contenders, given that player sales had been restricted prior to 1976. The hypothesis is supported by evidence of declining attendance during contending “streaks.”

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