The Effect of Free Agency and Luxury Tax on Competitive Balance in Major League Baseball

Samuel Essery ’25, Quantitative Economics major Faculty mentor: Dr. Fang Dong, Economics This study investigates the effects of free agency and the luxury tax on competitive balance in Major League Baseball from 1975 to the present. Using time-series models in R and various panel regressions in Stata, the analysis explores trends in team winning percentages and payroll disparities. The results suggest that while free agency initially widened gaps in team performance, the introduction of the luxury tax helped reduce payroll inequality. Findings provide empirical insight into how league policies have shaped long-term parity.