The Introduction of the Reserve Clause in Major League Baseball: Evidence of its Impact on Select Player Salaries During the 1880s

Abstract

This paper investigates the introduction of the reserve clause in Major League Baseball during the 1880s. Taking advantage of a unique data set describing the salaries for twenty nine high-quality players throughout the decade of the 1880s, we investigate the impact of the reserve clause as it evolved from a "gentleman's agreement" to a formal contract stipulation. We test three specific hypotheses concerning the reserve clause: its effect on average salaries, on the remuneration to marginal product, and the premium paid to a player for changing teams. The evidence suggests that introducing the reserve clause reduced average salaries and the premium for changing teams; detectable monopsony power was transferred to team owners almost immediately. However, there was no statistically significant impact of the reserve clause on how much players were paid for their marginal product. The empirical results indicate that reserve clause shifted considerable monopsony power to team owners immediately after it was instituted.Sports economics, monopsony, free agency, negotiation