The Welfare Consequences of the NBA: Superstar Markets and Human Capital Accumulation

In this paper, we examine the general equilibrium implications of human capital accumulation in the presence of superstar markets, in which small differences in skill translate into huge differences in earnings. Previous research has concentrated on the microeconomic wage implications of superstar markets, abstracting from the accumulation of human capital. The possible consequences of the existence of sports organizations such as the NBA on human capital accumulation among the poor has been discussed more widely in sociology than in economics. We develop a simple overlapping generations model in which a young agent can enroll in college to become an “accountant†; the resulting accountancy skill is drawn from an effort-dependent distribution. Likewise effort expended in “basketball†determines the distribution from which the sporting skill is drawn. The skill level has to be above a threshold for the agent to qualify as an accountant or an NBA player. While the threshold for accountancy is exogenously specified, the threshold for basketball emerges from the decisions of a basketball league. Failure to qualify for either occupation results in the agent becoming a “waiter†. College education involves tuition costs, which makes it resource-intensive relative to preparation for a career in basketball. Agents derive utility while young from a consumption good and while old also from sporting services and transfers made to their children. The consumption good is produced using accountants and waiters as inputs. A basketball league decides on the number of players to recruit, with the objective of maximizing earnings per player and subject to a minimum requirement of players. Since this requirement is small, and the league will always recruit the minimum number of players, the threshold for basketball is very high relative to the one for accounting. This captures one facet of the “superstar†nature of basketball. Young agents specialize, with those receiving large enough transfers enrolling in college and the rest working only on their basketball skills. We completely characterize the equilibrium dynamics that ensue. There is a unique steady state, but the corresponding GDP could be high or low depending on whether the accountants can afford to send their children to school or not. For instance, a high requirement of players (several minor leagues) than a low requirement (one major league) could yield a higher steady state. The allocations made by a planner who maximizes ex ante aggregate welfare would differ from those that result from the recruitment decisions of a monopolistic basketball league. We also provide quantitative estimates of the welfare effects of an expanded league, an improvement in the productivity of sporting services, and subsidies to college education.