Shirking or Stochastic Productivity in Major League Baseball?

Abstract

Firms produce in an uncertain environment. The long literature on the theory of the firm under uncertainty has focused on demand uncertainty [4; 18; 14], the unanimity question [8; 15], or technological uncertainty [23; 1; 7]. Regarding the latter, an interesting question is how that randomness enters the technology. One source might be purely unpredictable factors such as the weather or accidents. Agricultural output, for instance, is dependent not only on the quantity of inputs hired, but on the amount of rainfall, natural disasters, and the like. A different source of technical uncertainty is variations in the quality and reliability of the input services hired. In professional sports, for example, the performance of an athlete varies from game to game and season to season. The reliability of capital, a crucial issue in nuclear power generation, is another example reflecting the stochastic nature of input productivity.' One economic consequence of this randomness of productivity is that an employer cannot know a priori the input's value but rather must form an estimate of its expected marginal contribution. Spence [20] showed how an employer uses signals such as educational attainment to determine if a worker is worth hiring. Once hired, the firm still faces the difficulty of determining if a below average realization of productivity resulted from shirking by the employee or a bad draw from his productivity distribution. This agency problem, outlined in detail by Alchain and Demsetz [1] and Holmstrom [10], has important implications to our perception of work effort, especially in the presence of long-term labor contracts. Allegations of shirking due to long-term job security have been associated with seniority rights, professional athletes, and in the academic institution of tenure.

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