Free agency, competitive balance, and diminishing returns to pennant contention

This article argues that the 1976 introduction of free agency increased com petitive balance in Major League Baseball. The evidence is based on a new e mpirical measure that captures the key dynamic element of balance: year-to- year fluctuations in team performance. My hypothesis is that diminishing re turns to each additional year's "production" of a pennant-contending team r educes the incentive to bid continually for top players. Free agency allows talent to be reallocated more readily to potential new contenders, given t hat player sales had been restricted prior to 1976. The hypothesis is suppo rted by evidence of declining attendance during contending "streaks."