Suppose that the Anaheim Angels offer Mike Trout a contract of $16 million, wher

Question

Suppose that the Anaheim Angels offer Mike Trout a contract of $16 million, whereas Mike Trout asks for $26 million. Further suppose that if they go to final offer arbitration, the player will have to pay $1 million and the Angels will have to pay $1.5 million. Finally suppose that Trout believe he will win the arbitration with a probability of 80%, whereas the Angels believe that Trout will win the arbitration with probability of 90%.

a) What is the expected value of arbitration for Trout?

b) What is the expected value (loss) of arbitration for the Angels?

c) According to the book, will the settlement occur? Why or why not?

Explanation / Answer

a) Expected value of arbitration for trout = Expected Earning - Cost

= (80% * 26 + 20% * 16) - 1

= $23 million

b) Expected loss of arbitration for Angels = Expected Payments to Trout + Cost

= (90% * 26 + 10% * 16) +1.5

= $26.5 millions

c) Yes the settlement will occur, since the giver has already estimated higher cost than the receiver has expected to receive

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