1.1 Research Question and Objectives

The determination of salaries in professional sports represents a significant and well-established area of economic inquiry. While economic theory offers qualitative predictions about the relationship between productivity and compensation, the field of econometrics provides the essential tools to quantify these relationships with precision. By applying rigorous statistical methods to real-world data, we can move beyond abstract theory to estimate the magnitude and significance of the factors that drive economic outcomes in specialized labor markets.

This proposal outlines a study designed to answer the following primary research question:

What are the key quantifiable determinants of player salaries in Major League Baseball (MLB)?

To address this question, the research will pursue several core objectives. These objectives are grounded in the fundamental principles of applied econometrics, focusing on the specification of a theoretically sound model, the estimation of its parameters, and the validation of its results.

• Model Specification: To specify and estimate an econometric model that links player salaries (the dependent variable) to theoretically-grounded causal factors (the independent variables), such as on-field performance metrics and professional experience.
• Performance Quantification: To quantify the magnitude and statistical significance of key performance indicators, specifically slugging percentage, on player compensation.
• Experience Evaluation: To evaluate the effect of player experience, measured by tenure with a team, on salary levels.
• Diagnostic Testing: To conduct diagnostic tests to ensure the reliability of the model’s estimates, with a specific focus on identifying and addressing potential multicollinearity.

This structured approach will facilitate a detailed and robust analysis of the factors influencing MLB salaries, providing quantifiable answers to the central research question.

1.2 Significance of the Study

A robust econometric analysis of salary determination offers valuable insights for key stakeholders in the professional sports industry, including team management, players, and agents. By moving beyond simple correlations to explore causal relationships, this research can help delineate how performance translates into economic value. The academic study of “salary determination and personnel decisions in markets for professional athletes” is an established area of research in labor and personnel economics, and this proposal seeks to contribute to that body of work.

The practical and academic importance of this study lies in its application of empirical methods to test economic theory in a unique institutional context. Human capital theory predicts a strong link between productivity and pay, but the MLB labor market—characterized by complex contract structures, salary arbitration, and free agency—is a setting where such predictions require rigorous testing. By constructing and testing a methodologically sound econometric model, this study moves beyond merely quantifying salary drivers; it aims to test the validity of human capital theory within a specialized market featuring sophisticated performance measurement. This research will contribute to a more precise understanding of this market by quantifying the key drivers of compensation.