Review of Industrial Organization 14: 205–217, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Free-Agency and the Competitiveness of Major
CRAIG A. DEPKEN, II
The University of Texas at Arlington, Department of Economics, Arlington, TX 76019-0479, U.S.A.
Abstract. I investigate whether the removal of the reserve clause in professional baseball affected
the competitive nature of the industry in the context of whether the distribution of team wins has
been affected by free-agency. Unlike previous studies which use the standard deviation of winning
percentage, I use a more sensitive measure of parity. I calculate the deviations of the Herﬁndahl-
Hirschman Index of team wins from the competitive ideal during 1920 to 1996 and relate them to
player-talent distribution and structural changes in the industry. I isolate the structural effect of free-
agency and ﬁnd that it has adversely affected the parity of the American League but that it has had
no statistical inﬂuence on the parity of the National League.
Prior to its repeal in 1976, the reserve clause effectively eliminated voluntary factor
mobility in the labor market of major league baseball (MLB). In 1976 a market
for “free-agent” players was created in which players who are not bound by an
existing contract and have satisﬁed a minimum experience requirement of six years
can market their services to other teams in the major leagues.
movement of baseball labor is still possible via trades and drafts, with free-agency
there is now a considerable amount of voluntary movement in the industry. Many
authors (e.g., Cymrot (1983), Drahozal (1986), and Lehn (1984)) have focused on
this market in view of its efﬁciency and how it affects the distribution of profes-
sional baseball talent. However, relatively little attention has focused on whether
free-agency structurally altered the competitive nature of MLB. This point is of
interest because there is still debate as to the impact of free-agency on the industry,
and, in particular, the competitiveness of baseball teams.
Scully (1989), and later Quirk and Fort (1992), use the standard deviation of
team winning percentages in professional baseball to investigate the impact of free-
agency on competition, or parity. They ﬁnd that the standard deviation of winning
percentage in the American League (AL) did not statistically change after the intro-
duction of free-agency, whereas the National League (NL) saw an improvement in
The author wishes to thank W. Scott Frame, David R. Kamerschen, Maureen J. Lage and two
anonymous referees for helpful comments on earlier drafts of this paper. The usual caveat applies.
See Dworkin (1981) and Scully (1989) for more on the mechanics of the free-agent market.