April 09, 2013
Ten years ago, George Akerlof, Michael Spence, and Joseph Stiglitz shared the Nobel Prize in Economics for their research on markets with asymmetric information—that is, markets where different economic agents have different information about an economic good upon which they may transact. Of particular interest are cases where sellers of a good have much better information about the quality of that good than do potential buyers. Like most markets, the market for football players is full of information asymmetries that lead to very predictable problems. A sufficient understanding of this prize-winning research should help NFL front offices avoid making big, yet too often repeated, mistakes.
A prime example occurs in free agency, where the player and his former team know much more than do the other teams do about his “quality”—his ability, work ethic, injury history, and other key predictors of future production on the field. Akerlof's seminal paper, "The Market for Lemons: Quality Uncertainty and the Market Mechanism,” discusses the market for used cars as an example of the problem of quality uncertainty, where an inability to certify quality generates markets that are disproportionately filled with low quality goods.
Are free agents just like used cars? Of course not, so what becomes crucial to making good decisions is determining the key similarities and differences. When considering signing a free agent, the key question here, as in all player acquisitions, is: Why is this player available at this price?
Hundreds of free agents become available at the start of each new league year. Why do they hit the market rather than re-sign with their team? The answer is simple: the team was not willing to pay the price the player was demanding. In that case, why should some other team want to sign the player when they know less about that player’s quality than does his old team? The answer to this question tells you when you should be interested in signing a free agent.
There are several possibilities. For example:
Unlike used cars, players actually care about the conditions in which they work—for instance, there is much talk in Philadelphia about free agents wanting to play with Michael Vick.
Unlike used cars in general, players may truly be more valuable to the new buyer than the old buyer—maybe the system is a better fit for the player, maybe he was stuck behind an elite and/or high-cost player, or maybe the new coach is like an excellent mechanic who knows how to get the most out of his players (again, Michael Vick in Philadelphia comes to mind).
As in the case of used cars, maybe the previous team is just trying to save money—the truth is, some teams are not really trying to win this year or even next year.
The lemons problem makes clear why you cannot count on building a championship team while relying heavily on free agency. However, you can find a cherry amidst all the lemons if you can figure out why the player is available and act appropriately based on this information.
Big Money Free Agents
Elite players are hard to come by, but you need some if you want to compete for a championship. You can find them in the draft, but teams should not count on doing so unless they are picking very early. And if they are picking very early, then they are typically not competing for a championship anytime soon. An elite veteran who becomes available is generally on the downside of his career—that is why he is available. However, when a blue-chip, game-changing player with three-plus years of future high-level performance becomes available, that is when teams should consider going all out to get him.
Let’s look at the biggest free agent pickups each year since 2008, the year I started with the Philadelphia Eagles. Only one of them—Albert Haynesworth—looked like a bad decision at the time.
Asante Samuel — 2008 Philadelphia Eagles, reportedly $32 million over the first three years, $20 million guaranteed, and a total of six years for $57 million. Samuel was neither the first nor the last quality player to not get what he wanted from New England, and perhaps he was not a great fit there. Their decision to let him walk should not have been taken as red flag. Coming off ten interceptions in 2006 and six more in his 2007 Pro Bowl season, the 27-year old Samuel had the markings of a great free agent pickup for the Eagles several months before I got there. Three years, three Pro Bowls, and a league-leading 20 interceptions later, he in fact was a great pickup for Philadelphia and, at the age of 30, he should continue to produce. On the other hand, New England was left to draft cornerbacks in the 2nd and 4th and sign Deltha O’Neal in 2008, take another corner in the 2nd and sign Leigh Bodden and Shawn Springs in 2009, and then finally hit on 1st-round pick Devin McCourty last year.
Albert Haynesworth – 2009 Washington Redskins, reportedly $41 million over the first three years, $41 million guaranteed, and a total of seven years for $100 million. The Haynesworth signing looks like less of an information asymmetry problem than a matter of a team ignoring available information on the off chance that the player reinvents himself in a new city. Tennessee had good reasons not to pay him the money he wanted, but they were not the only ones—concerns about him both on and off the field were well known. He certainly had his moments as a dominating player, but he spent too much time on the injury report, off the field, and in the news for all the wrong reasons to be the type of player you should go all out for, and then some for a defensive tackle. It looked like a bad bet at the time, and now it looks historically bad in retrospect.
Julius Peppers – 2010 Chicago Bears, reportedly $40.5 million over the first three years, $42 million guaranteed, and a total of six years for $91.5 million. Peppers had just turned 30 but his production and injury history indicated that longevity was not a major issue. The only concerns I had about him arose from his lost season of 2007 with 14 games played and just 2.5 sacks, but those concerns were minimal considering that he missed no games, got double-digit sacks, and made the Pro Bowl in every other year
dating back to 2004. Moreover, 2010 was an uncapped year, so spending big money on him with a properly structured contract would have limited implications for future roster decisions—economists would say that the “shadow price” of signing him was lower than it would be with a cap in place. Peppers looked strong with another Pro Bowl season in 2010, helping to majorly upgrade the Chicago defense and bring them to the NFC Championship game. He should continue to produce at a high level for two more years. Why was Peppers available? For one thing, Carolina was not really trying to win in 2010, and they were extremely successful in that endeavor.
Nnamdi Asomugha — 2011 Philadelphia Eagles, reportedly $36 million over the first three years, $25 million guaranteed, and a total of five years for $60 million. We cannot blame Asomugha for wanting to leave Oakland—even a used car may try to get out of the Black Hole every once in a while—so Asomugha’s availability should convey no negative information. He is not young, having just turned 30 in July, but the data on elite corners indicate that he should give Philadelphia three strong years.
Jeff Dominitz is Senior Director at Resolution Economics LLC, an economics and statistics consulting firm with offices in Los Angeles and Chicago. He has a Ph.D. in Economics from the University of Wisconsin. For the past three years, Jeff was employed by the Philadelphia Eagles as Director of Statistics. In this role, he reported directly to the general manager and conducted studies for the team president, coaches, and scouts. He previously worked as Football Research Manager in the scouting department of the Washington Redskins. He has also held faculty positions at the University of Michigan, University of Southern California, the California Institute of Technology, and Carnegie Mellon University.