One of the major exploitable market inefficiencies in baseball is that teams pay so heavily for past accomplishments. No team does this more than the Yankees who have evolved into something of a straw man in this debate. The long contract which they gave to Alex Rodriguez means that the team will be playing Rodriguez more than $20 million a year in 2015-2017. Nobody can seriously think Rodriguez will still be an elite player by that time. Even if his current season is viewed as an off-year, it is not realistic to expect him to still be a top star during the last three years of his contract when he will make a total of $61 million.
The contrast in the AL East between the first place Yankees and the second place Rays who have managed to stay either in first place or within a few games of the Yankees for the entire season despite an enormous disparity in payroll demonstrates this. The reason the Rays have been able to compete with the Yankees is that while the two teams currently have comparable talent, the players themselves are at very different phases of their careers. Thus having a rather ordinary hitting middle infielder, Derek Jeter, or a troublesome starting pitcher, AJ Burnett, costs the Yankees a lot more than it does the Rays who pay between $400,000 and $2.5 million for comparable, or slightly better players such as Sean Rodriguez James Shields and Wade Davis.
The Yankees are a team full of highly paid players, and a team with many excellent players. In 2010, however, only have four players, Andy Pettitte, Mariano Rivera, CC Sabbathia and Mark Teixeira who fit into both categories. Both teams are getting great season from a number of players who are not all that well paid including Phil Hughes, Robinson Cano, Brett Gardner and Nick Swisher on the Yankees and B.J. Upton, Evan Longoria, David Price and Matt Garza on the Rays.
The Yankees are just one example. In any given recent year, there are dozens of players making more than $10,000,000, to pick an arbitrary number, while having years that are decidedly ordinary. This is partially due to the uncertainty and variation in year to year performance but it is also because so many veterans are paid on the basis of what they have done not on what they can be expected to do.
Currently, this situation acts as an equalizer making it possible for teams with players who are younger to compete with overpaid older teams, but when this changes there will be far more inequality in baseball. As soon as teams like the Yankees, Red Sox or Dodgers that long term contracts are financial time bombs and begin to have more relatively bad years because they are stuck with too many big contracts they cannot move, these teams will move towards shorter contracts at even higher salaries. Moreover, the ability of small and medium market teams to sign useful veterans to short contracts as the Tigers and Giants did with Johnny Damon and Aubrey Huff will also be lessened because if all free agents are signed for short term contracts, these veterans will seem more appealing to all teams, making it harder for less wealthy teams to find bargains. This will limit the ability of smaller market teams to compete for top free agents even more while taking away the one real advantage they currently enjoy.