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Termination Risk and Agency Problems: Evidence from the NBA

Author

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  • Alma Cohen
  • Nadav Levy
  • Roy Sasson

Abstract

When organizational structures and contractual arrangements face agents with a significant risk of termination in the short term, such agents may under-invest in projects whose results would be realized only in the long term. We use NBA data to study how risk of termination in the short term affects the decision of coaches. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA’s 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse.

Suggested Citation

  • Alma Cohen & Nadav Levy & Roy Sasson, 2018. "Termination Risk and Agency Problems: Evidence from the NBA," NBER Working Papers 24708, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24708
    Note: LE LS
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    Cited by:

    1. Bastian Kordyaka & Mario Lackner & Hendrik Sonnabend, 2022. "Can too many cooks spoil the broth? Coordination costs, fatigue, and performance in high‐intensity tasks," Southern Economic Journal, John Wiley & Sons, vol. 88(3), pages 1065-1085, January.
    2. Michael Allgrunn & Christopher Douglas & Sebastian Wai, 2024. "Optimal Timeout Choices in Clutch Situations in the NBA," Journal of Sports Economics, , vol. 25(2), pages 217-230, February.

    More about this item

    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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