Thursday, December 29, 2011

Moral Hazard of Designated Hitter (Part 1)

I did a little examination of the designated hitter rule for my Law and Economics course this past semester. Some portions of the paper include excerpts from other papers or quotes from economists, but because of the difficulty of citing on blogger, you will have to comment or email me if you wish to know where credit is due (as shown by the numbers throughout the paper). Sorry for that inconvenience! Enjoy! Let me know what you think.

Today, baseball is considered America’s pastime, but this was not always the case. In 1973, amid waning fan interest, the American League (AL) of Major League Baseball (MLB) instituted the designated hitter rule1. The National League (NL) did not adopt the change. The permanent implementation of the designated hitter rule has created an asymmetry between the AL and the NL, as well as between baseball fans, which has persisted for more than four decades.

Proponents of the rule argue that it boosts the much-needed offense while eliminating monotonous managerial decision-making.2 Opponents contest that the rule eliminates managerial finesse and turns baseball into an undesirably predictable game.3 In any case, with the AL adoption of the rule, engineers of baseball have inadvertently created a delightful scenario for economists: the designated hitter rule creates the potential for a moral hazard problem.

To analyze the designated hitter rule, this paper will be using a law and economics approach. Such an approach will show how the existing rule could fail to provide the proper incentives for private entities to engage in socially optimal behavior and, as a consequence, there exists a potential for a situation where such insurance against risk lowers the incentive to take precaution.4

Further, this paper will examine other costs and benefits of the designated hitter rule, in particular whether or not the benefits of the designated hitter rule outweigh the costs, including moral hazard.

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