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Termination Risk and Agency Problems: Evidence from the NBA

Author

Listed:
  • Alma Cohen
  • Nadav Levy
  • Roy Sasson

Abstract

When agents with a significant risk of termination in the short term have discretion over project selection, they may have incentives to underinvest in projects whose results would be realized only in the long term, and owners may take this agency problem into account when deciding whether to grant those agents discretion in decision-making. Because NBA rookies who participate in games gain NBA experience that likely improves their long-term performance, decisions of NBA teams about whether to let rookies play provide a useful context for investigating this potential agency problem. We develop a model that identifies when owners will choose to leave coaches with discretion over rookie participation decisions and shows that, in the presence of such discretion, coaches facing a higher termination risk can be expected to use rookies less often. Testing our model using NBA data, we find evidence that is consistent with the predictions of our model.

Suggested Citation

  • Alma Cohen & Nadav Levy & Roy Sasson, 2018. "Termination Risk and Agency Problems: Evidence from the NBA," Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(4), pages 579-618.
  • Handle: RePEc:oup:jleorg:v:34:y:2018:i:4:p:579-618.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewy018
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    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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