Since the mid-1980s, baseball teams have bid vigorously for free agents— players with six or more years of service who are free to sign with a new team. After signing a five-year contract with a new team for an exorbitant amount, a free-agent pitcher has had three consecutive lackluster seasons.
a. How might adverse selection explain this outcome?
b. How might moral hazard cause this outcome? Explain.
c. What advice would you give owners in bidding for free agents?