The Hometown Discount: Justin Masterson’s Fair Offer To The Indians

With just days before the 2014 season got underway, bad news came out of Goodyear: The organization had broken off contract extension talks with Justin Masterson. The headline came as a major surprise as just weeks before, it was reported that Masterson would likely give the Indians a “hometown discount” in order to play for manager Terry Francona. As much as Cleveland fans have heard this rhetoric before, there is hope that Masterson truly means what he says.

According to both the Jon Heyman link above and the Cleveland Plain-Dealer, Masterson has asked the Indians for a three or four year extension in the range of $40 to $60 million. I think we can safely assume that a three year deal would be closer to the $40 million figure and a four year deal would be closer to $60 million. Just to make the math easy, let’s say that his offer is $40 million for three years with a $5 million buyout on the fourth year, making it either 3/$45M or 4/$60M, depending on if the option is picked up. That’s the kind of structure that would make sense given the range of numbers being tossed around.

And of course those numbers pale in comparison to what the Reds just gave Homer Baily. Bailey, also set to be a free agent at the end of the year, got $90 million for five years with a $5 million buyout on a sixth year option, so the Reds either paid 5/$95M or 6/$115M to keep Bailey in Cincinnati for the long term. As mentioned in this week’s radio show, even the low end of Bailey’s total guarantee is 50% higher than the high end of Masterson’s reported asking price, making this seem like an obvious no-brainer for the club.

At least on paper.

On this site and others, there has often been a comparison between Bailey and Masterson, and rightfully so. Bailey getting $95 million for five free agent years could have easily become a baseline for a Masterson deal.  Here are their FIP numbers from 2011-2013:

Bailey’s a little better by ERA, Masterson’s a little better by FIP/xFIP, but the margins are pretty small. Both have been very good pitchers in two of these last three years, with each having one mediocre season in the mix. For Bailey, that came in 2011, while it was 2012 for Masterson. If you prefer to heavily weight more recent performances, maybe you have a slight preference for Bailey, especially because he is a year younger. If you care more about established track record, though, Masterson wins pretty clearly, as his pre-2011 performance blows Bailey’s out of the water.

They’re not the same pitcher, but each have pros and cons that essentially balance out. In terms of future expected value, there’s no reason to be significantly more high on one than the other. They both project as roughly 3 WARP pitchers for 2014 according to Baseball Prospectus’ PECOTA projection, and neither is at the point in their career that imminent decline should be expected. So Bailey makes sense as a baseline for Masterson’s price.

Except that setting a “baseline” certainly has it’s biases. It’s an issue to be aware of and attempt to avoid, not one to accept as a good pricing system. Especially in baseball, it is much better to base pricing “models” based on expected future performance and opportunity cost rather than simply looking at one comparable player and deciding his contract “sets the market”. Sometimes, that market setting contract is a wild overpay and it could be argued that Bailey’s contract was vastly a overpay.

So, instead of simply noting that Masterson’s deal is a bargain relative to Bailey’s deal, let’s look at it through the market as a whole. Dave Cameron of Fangraphs wrote a fantastic piece showing that the median price of a win this past off-season was in the range of $6 million. For above average players, it was a little higher than that, but the non-Tanaka starters all came in around that figure: Ubaldo Jimenez got $5.5M per win, Ricky Nolasco got $5.9M per win, and Matt Garza got $6.6 million per win. The 2014 forecasts put Masterson’s value squarely in this class of pitchers, but his longer health track record and 2013 excellence might bump him up a bit in the eyes of the market. Although Joe Coblitz disagrees with this valuation, it is a solid starting point to guess how much Masterson should be worth.

Masterson probably shouldn’t expect to get more than $7 million per win if he hits the free agent market next off-season. And since he turns 30 before the 2015 season, he won’t be a particularly young free agent. What would we reasonably expect a 30 year old Masterson to get as a free agent next winter? The standard half-WAR decrease aging curve would peg him at 7 WARP from 2015 through 2018, but maybe that’s too harsh; the 85% aging curve for players in their 30s that Baseball Prospectus uses for the $/WAR post would suggest 8 WARP over those same four years. The specific number doesn’t matter so much, but it’s safe to say that his forecast production over four free agent years is somewhere in the range of 7 to 9 WARP.

Even at $7 million per win assuming that Masterson continues to pitch at an above average level in 2014, that’s $49 to $63 million over four years. Or almost exactly what he’s rumored to be asking for.

The value to the Indians here probably isn’t the total cost, but instead, the chance to get that fourth year on a team option. Even if Masterson simply agreed to sign for 3/$45M with no option, it’s not clear that this is a large enough discount for a mid-revenue team like the Indians to take the risk of doing the deal a year ahead of time. After all, the Indians aren’t a team that can afford to buy a ton of market priced wins, and so to take on the risk of his 2014 health and performance, they could have received a huge discount over what Masterson would be expected to get as a free agent.

In looking at Masterson’s actual expected production and the market price of wins in free agency, Masterson’s asking price seems entirely reasonable. He made the Indians a solid offer at a price that made sense for him and probably made sense for them as well. But it seemed like the “massive bargain” reaction that I had, and many others seem to be having, might be more of a result of the Bailey overpay than anything else.

If we allow Bailey’s deal to “set the market” for good-not-great pitchers, then we’re tacitly acknowledging that this particular type of pitcher should be drastically overpaid relative to buying other types of wins on the market. Bailey’s deal shouldn’t be the anchor for a fair Masterson price. Bailey’s deal was too high, and the Indians are right to not want to to go anywhere near that price.

With that being said, we are left to wonder why a deal could not get done.

Let’s hope Masterson does not follow in the footsteps of Sabathia and Lee.