Contract Extensions: The Case of Major League Baseball

This article is concerned with how contract extensions create incentives that affect the characteristics of compensation of Major League Baseball players. We begin with a description of a number of attributes of the negotiation process. Using a sample of contract extensions, we summarize a number of characteristics of this phenomenon. For example, we show how both sides are made better off as a result of these negotiations and that most extensions take place during the last year of the existing contract. Furthermore, for those players with less than 6 years of service, the new contract typically extends beyond the player's arbitration-eligible years.