'Who's on first': an empirical test of the Coase Theorem in baseball
Because of their highly developed skills, major league baseball players generate significant economic rents. According to the 'weak version' of the Coase theorem, the allocation of these players is independent of who controls the rights to these rents, which depends on the rules governing competition in the baseball labour market. The rules of Major League Baseball establish a dual system. For senior players the market is competitive, and players have the right of 'free agency,' allowing them to attempt to contract with the team of their choice; for players with fewer years of experience the market is monopsonistic, and a player's right to play baseball is owned by his current team. Consequently, we simultaneously observe two different allocations of property rights. Using individual player data for 1979 and 1980 we test whether baseball player movement is independent of the ownership of these rents. We estimate the wage (marginal revenue) determination process for free-agent and non free agent movers and non-movers. This permits us to generate expected gains from a move for both free-agent eligible and non free-agent eligible players. Coase's theorem is tested by determining if both player types, and, hence, player allocation, are equally responsive to gains from migration.