Incentives in the labor market: theory and evidence from the NBA
This dissertation uses the institutional setup in the market for NBA players to test important hypotheses about how the labor market functions. Sports markets provide an ideal setting to study economic phenomena because of the wealth of publicly available information on productivity and compensation. In Chapter one, I analyze the effort incentives created by the existence of long-term contracts that guarantee players a wage irrespective of performance. I use a panel of all NBA players from 1999 to 2007 to show that player performance improves as the expiration date of the current contract draws nearer. Players perform ten percent better in the last year of their contract than in the penultimate one, an effect attributable to their interest in gaining a new contract. Despite the adverse effort incentives, teams may still prefer to sign players to multi-period contracts because risk-averse players are willing to accept lower salaries in return for greater security. In Chapter two, I use the fact that the NBA draft provides us with a quasi-natural experiment to analyze the impact of peers on player productivity and earnings. Using information for first round draft picks for a fourteen-year span I find that better teammates have a negative but statistically insignificant effect, on player performance. Teammate quality has a statistically and economically significant adverse impact on player wages. Thus the market appears to penalize players for having better teammates. I focus on the NBA's push to raise the minimum age of entry into the league in Chapter three. This phenomenon seems surprising since one naturally expects employers to encourage and entrenched workers to discourage entry of new workers into the labor market, as this should push wages down. I construct a three-period theoretical model in which the surplus accruing to teams can be higher when entry is restricted, even if the average productivity of NBA players declines. In our setting this outcome is driven by the existence of a fixed wage for rookies, which implies that the rents extracted from new entrants increase when entry is restricted.