Willingness to Pay for Used Baseball Pitchers. Suppose a healthy baseball pitcher is worth $5 million per

Question:

Willingness to Pay for Used Baseball Pitchers. Suppose a healthy baseball pitcher is worth $5 million per year to his team, compared to only $1 million per year for an unhealthy pitcher. Suppose that half the pitchers in the league are healthy, and half are unhealthy. According to an executive of a baseball team, if my assumptions are correct, our team is willing to Pay a maximum of $3 million for a pitcher in the free-agent market' (Related to Application.)
a. What are the executive's assumptions?
b. Are these assumptions realistic?
APPLICATION BASEBALL PITCHERS ARE LIKE USED CARS
APPLYING THE CONCEPTS #3: Does the market for baseball pitchers suffer from the adverse-selection problem? Professional baseball teams compete with each other for players. After six years of play in the major leagues, a player has the option of becoming a free agent and offering his services to the highest bidder. A player is likely to switch teams if the new team offers him a higher salary than his original team. One of the puzzling features of the free-agent market is that pitchers who switch teams are more prone to injuries than pitchers who don't On average, pitchers who switch teams spend 28 days per season on the disabled list, compared to only 5 days for pitchers who do not switch teams. This doesn't mean that all the switching pitchers are lemons; many are injury-free and are valuable additions to their new teams. But on average, switching pitchers spend five times longer recovering from injuries.
This puzzling feature of the free-agent market for baseball players is explained by asymmetric information and adverse selection. Because the coaches, physicians, and trainers from the player's original team have interacted with the player on a daily basis for several years, they know from experience whether he is likely to suffer from injuries that prevent him from playing. In contrast, the new team has much less information. its physicians can examine the pitcher, and the team can check league records to see how long the pitcher has spent on the disabled list, but these measures do not eliminate the asymmetric information. The original team has several years of daily experience with the pitcher and has better information about the picher's physical health
Now consider the incentives for a team to outbid another team for a pitcher. Suppose the market price for pitchers is SI million per year, and a pitcher who is currently with the Detroit Tigers is offered this salary by another team. If the Tigers think the pitcher is likely to spend a lot of time next season recovering from injuries, they won't try to outbid the other team for the pitcher: They will let the pitcher switch teams. But if the Tigers think the pitcher will be injury-free and productive, he will be worth more than S1 million to them, and they will outbid other teams and keep him. That's why an injury-prone pitcher is more likely to switch teams. As in the used-car market, there are many 'lemons" on the used-pitcher market. The market for baseball players playing other positions does not suffer from adverse selection, perhaps because the injuries that affect their performance are easier for other teams to detect Although you may think it's bizarre to compare baseball pitchers to used cars, people in baseball don't think so. They recognize the similarity between the two markets. Jackie Moore, who managed a free-agent camp where teams looking for players can see free agents in action, sounded like a used-car salesman: We want to get players off the lot. We want to cut a deal. How many camps can you go into where you can look at a player and take him home with you?". SOURCES: Based on Kenneth Lehn, "Information Asymmetries in Baseball's Free Agent Market; Economic Inquiry22 (January 1984): 37-44: Associated Press, "Free Agents at End of Baseball's Earth' Corvallis Gazette-Times, April 15, 1995.