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Early Entry in the NBA Draft: The Influence of Unraveling, Human Capital and Option Value

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  • Peter Groothuis
  • Richard Hill
  • Timothy Perri

Abstract

In an influential article, “Unraveling in Matching Markets,” Li and Rosen (1998) note the first seven picks, and 17 among 29 first round selections of the 1997 NBA draft, were not college seniors. In 2004, the first pick in the NBA draft was a high school senior, and 25 of the first 29 picks were not college seniors. Li and Rosen (1998) suggest early entry is a form of unraveling in a labor market as firms attempt to secure the most promising player. We suggest recent NBA contract provisions implemented to slow the early entry of talented players have instead provided additional incentives to both players and firms for early entry into the NBA. In particular, the lowering of the fixed wage contract and lengthening of rookie contracts have given firms limited monopsonistic power and the ability to capture economic rents. We explore two competing models that predict why teams choose a talented player sooner under the new rookie contract system. The first model is the traditional human capital model, and the second is the Lazear (1995) option value model. To test why unraveling occurs, we use a panel study of all NBA players for 12 years from 1989 through 2002. The data include individual player performance statistics on a season-to-season basis, salary, and draft number.

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File URL: http://econ.appstate.edu/RePEc/pdf/wp0405.pdf
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Bibliographic Info

Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 04-05.

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Date of creation: 2004
Date of revision: 2005
Handle: RePEc:apl:wpaper:04-05

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  1. Roth, Alvin E, 1991. "A Natural Experiment in the Organization of Entry-Level Labor Markets: Regional Markets for New Physicians and Surgeons in the United Kingdom," American Economic Review, American Economic Association, vol. 81(3), pages 415-40, June.
  2. Edward P. Lazear, 1995. "Hiring Risky Workers," NBER Working Papers 5334, National Bureau of Economic Research, Inc.
  3. Roth, Alvin E. & Sotomayor, Marilda, 1992. "Two-sided matching," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 16, pages 485-541 Elsevier.
  4. Christopher R. Bollinger & Julie L. Hotchkiss, 2003. "The Upside Potential of Hiring Risky Workers: Evidence from the Baseball Industry," Journal of Labor Economics, University of Chicago Press, vol. 21(4), pages 923-944, October.
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Cited by:
  1. Peter Groothuis & James Richard Hill & Timothy Perri, 2009. "The dilemma of choosing talent: Michael Jordans are hard to find," Applied Economics, Taylor & Francis Journals, vol. 41(25), pages 3193-3198.
  2. Dennis Coates & Babatunde Oguntimein, 2008. "The Length and Success of NBA Careers: Does College Production Predict Professional Outcomes?," Working Papers 0806, International Association of Sports Economists;North American Association of Sports Economists.

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