Cost Control in Professional Sports

Professional sports, unlike most other industries in America, have provided with the opportunity to succeed. One possible focus of such a determination may be the present economic situation faced by NBA players. The top NBA players, and some not so top, have been made financially secure for life. At salaries near or in excess of $1 million per year, often in up-front cash, it is only a matter of prudent handling of these finances that should be of concern. While only a few players actually exceed the $1 million per year mark (still under ten players as of the 1984-85 season), the fact that these few have topped the milestone, and that several others follow not that far behind in the $500,000 to $1 million range, suggest that, at least for the chosen, the NBA is a path to riches.

There are many economic models of labor contracting that feature job performance monitoring by employers when there is asymmetric information about worker behavior. These models focus on a variety of agency issues and generate implications about contract terms such as initial wages, wage-tenure profiles, termination rates, and involuntary unemployment. It is typically assumed in these models that a worker’s Marginal Revenue Product (MRP) is known at the time of hiring, but that costly monitoring is necessary to enforce contractual terms. An athlete’s productivity is often quite variable over time. For example, in professional basketball points scored per game or minute is typically variable over time and the amount of variability can differ substantially across players. Second, contractual arrangements in the NBA induce team owners to actively monitor players, particularly younger players. However, there is seriously doubt that Stiglitz’s required conditions for an inverse relationship between variance and pay would be satisfied in an industry such as professional basketball. It is not unusual to see players sign contracts where a relatively large proportion of compensation comes from incentive pay. For example, during the 1990-1991 season Larry Bird (Boston Celtics) received 69% of his compensation from incentive pay and Patrick Ewing (New York Knicks) received approximately one-third of his compensation from incentive pay. (Brown, Eleanor, Richard Spiro, and Diane Keenan. 1991) We contend that if a player is willing to be paid relatively large amounts of incentive pay, exposing him to substantial risk, it is unlikely that his level of risk aversion will exceed that of the firm.

Implications are developed and tested on a sample of 151 players in the NBA during the 1990-1991 season. A notable result is that while specialists find strong support for our monitoring costs hypothesis, they fail to find evidence of racial discrimination against black players in the 1990-1991 season. This result differs from Kahn and Sherer [ 1988 ] and other authors who have written on the subject of racial discrimination in the NBA.

In truth, it is hardly slave labor at the bottom. The NBA minimum salary for 1984-85 was $65,000 and will climb. The average salary for all players in the league was $340,000. If a player can stay in the NBA for a few years, whether or not a star, the good money will be there. From the players’ perspective, for those who make it, the making is marvelous. …