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Markets in Everything - Relief Pitcher Earnings
Randy Newsom, relief pitcher for the Cleveland Indians, is selling 4% of his future major league salary. There are 2,500 shares in the IPO so each share gets you a claim to 0.0016% of his future salary including bonuses. Shares sell for $20 each.
Hat tip to Mike Makowsky. Mike, a rookie GMU PhD on the job market, is also entertaining offers for a share of his future salary. Mike is feeling rather risk-averse so as an insider, I recommend you buy now. Mike has a great career ahead of him and this opportunity won't last long!
Posted by Alex Tabarrok on January 23, 2008 at 07:15 AM in Economics | Permalink
Comments
It would be helpful if Makowsky's link weren't gated.
Posted by: at Jan 23, 2008 7:19:46 AM
Must be something wrong with the Mason server. Bad timing!
Posted by: Steve Miller at Jan 23, 2008 8:51:35 AM
Is this legally binding? If so, why is this not done more often?
Posted by: EZ at Jan 23, 2008 8:55:18 AM
Should't that be 0.000016% per share?
Posted by: anonymous at Jan 23, 2008 8:57:53 AM
If this catches on, how long before agents begin negotiating for 'non-bonus payouts' to players?
Posted by: meter at Jan 23, 2008 9:11:08 AM
It seems to me that this is only attractive to the extent that a person sells a small minority of the shares of his income. Otherwise, the effect would be the same as a high marginal tax, wouldn't it? And we know what high marginal tax rates do to incentives.
Posted by: Slocum at Jan 23, 2008 9:13:53 AM
Makowsky sells 4 % of his future major league salary. He issues 2,500 shares. Each of the 2,500 shares will get you a claim to 0.0016 % of only 4 % of his future earnings, not 0.0016 % of his TOTAL future earnings. This means that each share will get you only 0.000064 % of his total future earnings. Is that still a recommendation?
Posted by: thedevilsinthedetail at Jan 23, 2008 9:40:10 AM
What's Mike's batting average and ERA?
How often do GMU grads get recruited into the major leagues?
Posted by: eddie at Jan 23, 2008 9:42:28 AM
Very good point by Slocum. Also by meter.
I will add that since earnings for sportspersons earnings
does not vary much after a contract has been negotiated,
thus making it analogous to a call option with a shorter
maturity than many people think.
Posted by: sa at Jan 23, 2008 9:44:39 AM
When confronted by conservatives and libertarians that claimed they'd never collect a cent from Social Security, I offered to buy their future social security income for a small amount. Funny how they never were willing to back up their bluster.
Posted by: Mike Huben at Jan 23, 2008 9:49:49 AM
Where did you guys learn math? 0.000016 * 2,500 = 0.04. So 1 share does in fact earn you 0.0016% of his total salary and 2,500 shares is for a total of 4% of his salary.
Posted by: Mo at Jan 23, 2008 10:02:27 AM
Brilliant! Instead of a free market, person to person debt (such as at propser.com), it's free market equity!
A HUGE future possibility seems to be in funding college. How much would .0015% of a future lawyer's salary be worth to you?
Posted by: pawnking at Jan 23, 2008 10:03:19 AM
$50,000 raised by selling off 4% of future income. That means the whole system breaks even at a lifetime earnings in the league of $1.25 million, meaning that probably one year of a proper major league contract will pay the whole thing off. Granted, considering that four years out of college, he's still in AA ball... it sounds like a rather risky proposition.
Posted by: Michael Fisk at Jan 23, 2008 10:37:31 AM
He's 25 and barely out of A ball (link). Given his K/BB in Double-A, I expect he'll repeat. He's already a reliever, and his specialty seems to bee keeping the ball in the park. I'd say his ceiling is Kevin Gryboski (career $1.5 million, 180+ innings pitched from 2002-2006). He'll be lucky to make the big leagues, and even if he does he probably won't survive until arbitration status or free agency, when his salary will rise quite a bit. $20/share seems a bit high, but it's not worth figuring out how to sell this short.
Posted by: JC at Jan 23, 2008 10:37:54 AM
So if 4% of Newsom's salary is going to be subject to personal income taxes and capital gains taxes, anyone who buys a share is only going to see about 52 cents on the dollar. Am I missing something?
Posted by: effay at Jan 23, 2008 10:41:36 AM
Onward JC; make the market for shorts in the comments of Marginal Revolution!
Posted by: effay at Jan 23, 2008 10:45:50 AM
I think this is not as unusual as it sounds. I've read that golfers starting on the pro tour sometimes have sponsors who cover expenses in exchange for a share of winnings fro some limited time.
I know a man who was asked to invest $5000 in launching the career of a talented local country singer who hoped to make it big in Nashville. He thought it too risky.
Garth Brooks.
Posted by: Bernard Yomtov at Jan 23, 2008 11:14:14 AM
Here's an interview from Baseball Prospectus on Newsom and RSI (evidently
it's his company).
Posted by: Aaron at Jan 23, 2008 11:43:37 AM
Mike Huben,
E-mail me. I'm all ears. I've wanted to sell for a long time, but I haven't looked into the legality. Actually, I wanted to start a business where people could buy and sell claims to the benefits of others, but I'm too lazy to do anything about it.
Anyway...
Mike, let me make the first offer. You can have all my future benefits for 95% of all my past and future contributions, plus 95% of my employers' contributions. You'll pay me biweekly, and I'll pay you when I start collecting.
Posted by: Steve at Jan 23, 2008 12:40:34 PM
I've wondered if a way to supplement public school teachers salaries would be to give them "stock options" on the future earnings of their pupils.
Posted by: Steve D at Jan 23, 2008 1:23:35 PM
I've wondered if a way to supplement public school teachers salaries would be to give them "stock options" on the future earnings of their pupils.
Posted by: Steve D at Jan 23, 2008 1:23:51 PM
effray,
It is not stated explicitly, but based on the website's statements, the payout is off the top of the player's salary. The investor would then be responsible for paying the appropriate tax.
Posted by: Rick at Jan 23, 2008 1:39:50 PM
I've wondered the same as Steve D. The only sticking point is that these children are not old enough to sign away part of their future salary, though their parents could. This would be an important feature of a free market school system.
Posted by: stanfo at Jan 23, 2008 2:15:02 PM
Right, because there's nothing like being paid peanuts in the here and now only to have to wait 20-30 years to maybe collect on something. Sounds like Social Security with more gambling risk.
Posted by: meter at Jan 23, 2008 2:22:10 PM
A HUGE future possibility seems to be in funding college. How much would .0015% of a future lawyer's salary be worth to you?
My uncle offered to do this 25 years ago. He suggested paying for ivy league tuition in exchange for a percentage of my future salary.
Posted by: Slocum at Jan 23, 2008 2:25:28 PM
