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Incentives v. Restrictions & The New NBA CBA

February 22, 2011

Carmelo Anthony, Dwyane Wade, and LeBron James in younger days

 

By now, you know that Carmelo Anthony has been traded to the New York Knicks. He is the latest example of a veteran on the verge of free agency who wanted to control his own destiny. With the new NBA collective bargaining agreement (“CBA”) on the horizon, what does the forced trade mean for the league and the players?

One of the major changes rumored for the next CBA is further restriction on movement for veteran players. NFL-style franchise tags have been talked about. Hard caps and the elimination of exceptions have been mentioned. There are honestly a variety of ways to restrict player movement that can be created or borrowed from other leagues. How about MLB and NHL style arbitration? Wouldn’t it be fun to hear Carmelo’s reaction to any team describing how he doesn’t play defense and thus should be paid less?

There are many reasons for these proposed changes. The NBA wants to maintain competitive balance, keep stars spread out through the league, and insure that small market teams can be financially viable. This is why restricted free agents are subject to a right of first refusal with their hometown team. What about veteran free agents like LeBron James, Chris Bosh, Carmelo Anthony, and Chris Paul who is rumored to be on his way out of New Orleans in the not-to-distant future?

Wait, doesn’t the NBA have a method of doing all of these things by incentivizing players? Theoretically, the Larry Bird exception and the ability for a home team to pay its own player more money for a longer period of time are supposed to protect competitive balance, spread out stars, and allow for small market viability, but the NBA is finding that incentives don’t work as well as restrictions could work. With their young players, the NBA has restricted their movement, and players like JJ Redick with the Magic and Josh Smith with the Hawks had to stay in their hometowns after their teams matched other offers. With veteran players, the NBA believed that incentivizing their players with more money over more years would work for the good of the league, but the Association is learning quickly that more money doesn’t always mean that home teams get to keep their players. Incentives don’t always work.

Restricting the movement of veteran players is not a novel concept. MLB does it by allowing teams to offer arbitration to veteran players and causing their new teams to give up draft picks for signing the player. This is absolutely a gorilla on the back of many free agents as was seen by Rafael Soriano’s decision after the 2009 season to accept the Braves’ offer of arbitration after no team would sign him as a Type A free agent. In the NFL, everyone is familiar with the franchise tag which allows a team to keep a player by agreeing to pay a high salary. Michael Vick of the Eagles just received such a tag and lacks the ability to leave Philadelphia.

The new CBA in the NBA will restrict veteran player movement because incentives don’t always work, and the reason that they don’t always work is because you can’t individualize incentives. Each players values things differently, yet the NBA’s system is the same for everyone. LeBron left Cleveland for the opportunity to play with Dwyane Wade and Bosh. He left the max money because winning was important. For stars like LeBron, Carmelo, Paul, and the other big names, the ability to win championships, play in a big market, and raise their status will lead to future earnings in sponsorships and endorsements that will make up for the money left at home. That’s what the NBA didn’t realize. There are ways to make money outside of max deals, and the players who can get a max deal most likely have the easiest time making extra money. Additionally, the economic argument about marginal benefit exists here. The 100th million dollar brings less marginal benefit than the 1st million dollars, so by the time a player is thinking about the difference of $99 million and $100 million dollars, he may value place of work or quality of co-employees more than money. What’s more, teams engage in “sign and trade” agreements in which the player actually signs with the home team before the trade in order to get the max money. This completely breaks the incentive structure the NBA wanted to build.

What the NBA has realized is that incentives don’t work like restrictions work with their restricted free agents. Because the owners are losing money and are willing to lose a season, the NBA players will soon realize the same lesson.

– Jason

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One Comment leave one →
  1. John permalink
    February 22, 2011 1:20 pm

    ROCK OUT!

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