Evaluating Market Inefficiencies of the National Basketball Association Through the Lens of the League’s New Collective Bargaining Agreement

Open Access
Author:
Cooper, Justin
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Charles Theodore Murry, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • Economics
  • Sports Economics
Abstract:
With an average tenure length of approximately three seasons for a National Basketball Association (NBA) coach and general manager (GM) the pursuit to win and win fast is imperative. An industry worth billions of dollars offers an environment for the greatest minds available in the fields of advanced metrics and scouting to rise to the top. How is it that in an industry such as this there could be a market inefficiency stemming from these experts? In 2016, a new Collective Bargaining Agreement (CBA) ratified by both players and owners brought a whirlwind of change to the economic landscape of the league. With a new revenue sharing model, contract specifications and dynamic salary cap there was a plethora of influential factors that could cause a market inefficiency to arise. The 2017 Golden State Warriors and Cleveland Cavaliers swept through the NBA playoffs, only losing one game collectively up until the final round. With fewer playoff games than anticipated came a decrease in projected Basketball Related Income (BRI) which reduced the projected cap by millions of dollars. This in conjunction with the uncharted territory for decision makers in this new era of free agency resulted in players who were signed in the 2016 and 2017 off-seasons to be massively overpaid above their marginal product of revenue. Salary cap space for the 2018 off-season is a hot commodity as the cap has not increased nearly as much as was projected and cap hits are being taken left and right from ill-advised contracts. A market correction very well may be looming in the years to come which will allow for a retrospective study to be completed in conjunction with this paper.