Essays on the Economics of the National Basketball Association (N.B.A.): Testing for Inefficiencies in the N.B.A. Labor Market
This dissertation is comprised of three economic essays, that each examine the labor market for players in the National Basketball Association (N.B.A.). Neoclassical economics often incorporate models that assume individuals are utility-maximizing agents who behave rationally. However, many studies in the field of behavioral economics have found evidence of irrational decision making, both within laboratory environments as well as in natural settings. The objective of this paper is to provide additional research to this growing body of literature by using empirical data collected from the N.B.A. to conduct quasi-field experiments. Although some may question their generalizability, one of the main advantages of using professional sports data is due to the abundant amount that is meticulously collected and regularly updated. Additionally, the enormous financial incentives rewarded to professional athletes make a strong case for the validity and reliability of the results. The first chapter of this paper looks at whether the quality of program a basketball player chooses to play while in college, has any significant effects on their future professional careers. The paper uses salary and performance data from both Division I Men’s N.C.A.A. Basketball as well as the N.B.A. to compare players who attended what I consider to be “elite college basketball programs” to those who had offers to play at one of these elite programs but instead chose to attend another school. The research was partially motivated by an earlier study that looked at the financial effects of attending more academically selective colleges. Despite the common belief that academically elite schools would offer greater financial benefits upon graduation, the researchers found no significant differences in the career earnings of students who attended elite schools to those who were accepted to elite schools but chose to attend other, less selective schools. Using several econometric models, the results from this chapter indicate that players who attended elite basketball programs played fewer minutes in college and delayed their entrance to the N.B.A., compared to the group that attended non-elite programs. Furthermore, the career earnings of the group that attended elite schools are found to be significantly lower when adjusting for relevant variables. The second chapter uses a sharp regression discontinuity design to examine whether an N.B.A. player’s career is significantly affected by which side of the round cutoff they were selected during the league’s annual rookie draft. Traditional economic theory would argue against any significant differences around this arbitrary cutoff point – one that has been artificially constructed by the league. Rather, financial compensation and playing time should be primarily based on a worker’s expected productivity, regardless of where they were selected in the draft. However, earlier studies that looked at the National Football League (N.F.L.) have found evidence of substantial differences in compensation, as well as the perceived value of football players who were chosen before the round cutoffs compared to those selected immediately after. These initial differences in compensation and perception could create long term effects on a player’s future productivity. Behavioral economics would attribute these findings to cognitive biases that humans are vulnerable to when decision making. Contrary to my initial hypothesis, that results similar to that of the N.F.L. would also occur in the N.B.A., the findings from this study fail to find any significant differences in player earnings and productivity at the round cutoffs. These results help support previous studies that found that earlier inefficiencies that had existed in the N.B.A. labor market, have since disappeared over the years. The final chapter of this paper examines the effects the 1995 N.B.A. rookie wage scale had on the salaries and productivity of players who entered the league after its implementation. The rookie wage scale was introduced as a means of reducing the guaranteed salaries rookie players could receive upon entering the league. Using a fixed effects model, the initial test results show that the rookie wage scale did indeed have a significant negative impact on rookie salaries. The efficiency wage model of worker productivity predicts that an increase in salaries should incentivize workers to put forth more effort. If the efficiency wage model is accurate in describing the behavior of N.B.A. rookies, players who entered the league after the rookie wage scale will exert less effort because of a decline in their salaries relative to their peers. Assuming that effort is an important component in a player’s production function, their productivity should therefore decline compared to similar players who entered the league prior to the wage scale. To test for this, I compare the career performances of players who entered the league before and after the rookie wage scale. The results fail to find evidence of a significant difference in performance; both during the immediate years after signing as well as in overall career performance. However, results from additional regressions comparing the two groups of players indicate that the rookie wage scale significantly lowered the average age of incoming players as well as increased the length of their professional careers.
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