Price Controls in the NBA Force Teams to Find Different Ways to Keep Their Stars

(Photo: Keith Allison)

The NBA free agent market opened this month and the moves making headlines include:

  • Steve Nash signing with the L.A. Lakers
  • Ray Allen signing with the Miami Heat
  • Jason Kidd signing with the New York Knicks
  • Deron Williams re-signing with the Brooklyn Nets

And then there is the Dwight Howard saga. 

Each of these stories appears to be summarized by a familiar line: 

Big star signs in Big Market. 

In fact, Gordon Monson (of the Salt Lake Tribune) wondered recently how the Utah Jazz – or any small market team — can possibly compete in today’s NBA.

Monson’s argument may seem like a familiar refrain for fans of small market teams.   For decades, fans of small market teams in baseball have watched their star players take the field for the New York Yankees (and other big market teams).  Economists would note that such movement makes sense.  Players can generate more revenue playing for large market teams, so we would expect large market teams to be willing to pay more money to the top players.   This explains why Alex Rodriguez might be worth $30 million to the New York Yankees, but A-Rod – even if he was the same player with the Royals – might not be worth that salary in Kansas City. 

In the NBA, though, this story doesn’t quite work that way.  Back in 1999, the players and owners agreed to a maximum salary for individual players.  And this maximum salary was placed at a level that would allow any team to not only bid for the top talent, but make a substantial profit if the top talent would agree to play for their team.

To illustrate, let’s talk about the NBA’s upper class.   About 10% of the NBA’s players were paid at least $10 million this past season.   But surprisingly, a number of these players were actually underpaid.

Consider the admittedly crude methodology I employed in discussing the most overpaid NBA players with CNBC a few weeks ago.  The NBA paid its players about $1.9 billion last season to produce 990 regular season wins (quick note: players are paid for the regular season and the primary driver of revenue in the NBA is wins, not star power).  That means the NBA paid about $1.95 million per win last season.   Given the player’s statistical production on the court, we can measure how many wins each player produced (as explained at the Wages of Wins Journal, as well as in books and academic articles).

For example, last year LeBron James produced about 15.9 wins for the Miami Heat.  If each win was worth $1.95 million (again, a crude estimate) then LeBron should have been paid $30.9 million.  But his contract called for him to be paid only $16.0 million. That means – according to this analysis — LeBron was underpaid by nearly $15 million.  And that also means that any team in the NBA would be more than happy to employ LeBron at his current wage. 

A similar story can be told by each of the players on the following list.  Of the players who earned at least $10 million last season (salary data taken from DraftExpress), these are the 10 most underpaid players.

Rank

Player

Team

Wins
Produced

Estimated
Value of Wins

Salary

Underpaid*

 

1

LeBron James

Miami

15.88

$30,905,996

$16,022,500

$14,883,496

2

Tyson Chandler

New York

12.84

$25,001,255

$13,107,837

$11,893,418

3

Chris Paul

LA Clippers

14.12

$27,475,279

$16,647,180

$10,828,099

4

Joakim Noah

Chicago

11.56

$22,496,172

$12,000,000

$10,496,172

5

Steve Nash

Phoenix

10.86

$21,143,745

$11,689,062

$9,454,683

6

Rajon Rondo

Boston

9.24

$17,981,553

$10,045,455

$7,936,098

7

Andre Iguodala

Philadelphia

9.80

$19,079,047

$13,531,750

$5,547,297

8

Kevin Durant

Oklahoma

9.45

$18,386,013

$13,603,750

$4,782,263

9

Dwight Howard

Orlando

11.00

$21,411,573

$17,149,243

$4,262,330

10

Andrew Bynum

LA Lakers

9.46

$18,409,989

$14,900,000

$3,509,989

*Estimated – Salary

As you can see, LeBron tops the list.  Further down the list we see Kevin Durant and Dwight Howard.  Each of these players played in small markets last year.  And each, despite a relatively high salary, was worth more to their respective small market team than the salary the player was paid.

Of course, one of these players wants to leave his respective small market team.  Howard has made it clear that he wishes to depart Orlando.  But it is not because another team can pay him a higher salary.  And it isn’t really about endorsements.  Howard – with $11 million in endorsements — currently ranks in the top 6 in endorsements in the NBA (Durant is also in the top 6);  ahead of large-market “stars” like Carmelo Anthony and Amare Stoudemire (and LeBron James earned $28 million in endorsements his last year in Cleveland).

If it isn’t the money, what’s driving Howard out of Orlando? It appears that Howard is following the same path as LeBron.  He is leaving the team that drafted him because he doesn’t believe he can win a title in Orlando. 

In contrast, Durant appears to be staying in his small market.  He made this decision back in 2010, before the Thunder appeared to be title contenders.  And his faith appeared be rewarded when the Thunder made its first trip to the NBA Finals this year.

The behavior of both players illustrates a basic lesson taught in economics.  When one imposes a price ceiling – and that is what a cap on individual salaries is – resources must be allocated by something other than prices. 

With respect to the NBA, the ceiling on salaries is causing the top players to allocate themselves according to one specific non-salary issue.  Again, consider the LeBron saga.   LeBron didn’t leave Cleveland because the Cavaliers couldn’t afford his services.  LeBron left Cleveland because he wanted to win a title (which he did).  Now it appears that Howard is following the same pattern.  And Durant’s ability to contend with the Thunder is probably part of the reason he appears to be happy in Oklahoma.

In essence, this story is similar to what we already see in college basketball.  Why do the top high school athletes flock to Kentucky every year?  It’s not because Lexington, Kentucky is a large market.  Players like John Wall, DeMarcus Cousins, Brandon Knight, Michael Kidd-Gilchrist, and Anthony Davis went to Kentucky because they had a chance to contend for a title.  A similar story is told about players who attend Duke, North Carolina, and Kansas.  None of these schools are in large markets.  But all provide a program that consistently competes for championships. 

What we see in college basketball provides us with the blueprint Utah can follow.   Fans of the Jazz worry that when players like Derrick Favors (assuming he can develop into a productive “star”) reaches the end of his rookie deal (a deal that generally allows a team to significantly under-pay a player), he will bolt for a bigger market.  But as Oklahoma City has demonstrated, that doesn’t have to happen if the player thinks his current team can be successful.  And that can happen if a team simply finds a collection of players that help a “star” contend.

We have already seen how this didn’t happen in

  • Minnesota with Kevin Garnett
  • Cleveland with LeBron James
  • Orlando with Dwight Howard

In each instance, a team had a very productive player. But one player can’t win a title. You need other pieces to contend.  And the people leading these franchises clearly couldn’t identify enough pieces to make a title happen.

In contrast, the San Antonio Spurs – another small market team – keeps contending.  Even though Tim Duncan has slipped, the Spurs still had the best record in the NBA in 2011-12 because of players like Kawhi Leonard, Danny Green, Tony Parker, and Manu Ginobili.  None of these players were lottery picks. And Leonard and Green are hardly major scorers.   But all were quite productive for the Spurs last season.

The Jazz need to follow the example provided by the Spurs.  Identify a few non-stars who produce wins.  If you can do this, your stars – and your team — will win.  And then your “stars” will be

  1. Happy to stay in Utah.
  2. And the Jazz can continue to earn a substantial profit employing these stars.

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  1. Roger says:

    My friend, Karl, wants to know where the estimated underpaid dollars went…

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    • alex in chicago says:

      Dwight, they went to overpaid players. Mostly the NBA Middle and Lower class (there is a minimum salary, and players have guaranteed contracts).

      More generally, what this chart illustrates, is that in order for ANY team in the NBA to be a contender it must not make “good” contract decisions, it must “rip off” at least a few players.

      Also, this wins produced chart is dubious. Basketball reference has different numbers for winshares that are…better.

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  2. Dwight K Schrute says:

    interesting how the price controls distort the market for basketball as well as any other commodity.
    It puts a larger value on the teams brains than their dollars (why the knicks have been mediocre at best for the past 10 years:).
    Oklahoma City and San Antonio have drafted well (managed their assets) and have competitive teams in what would be considered non-prime markets.
    Cleveland and Orlando failed to surround their core asset with the proper pieces, and either are (or will be) rebuilding.
    Football has team caps but not individual caps, and does a better job of ensuring parity and would sell out a superbowl that any team.

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  3. Andrew says:

    Lebron, Wade, and Bosh could have all came to Cleveland. There are also the aspects that Miami is a “more fun” city than Cleveland (probably why not many players wanted to join LeBron in previous years) and that Florida has lower taxes.

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    • Geoff says:

      *NO* state taxes in Florida.

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      • Jason says:

        Yes, Florida is a better deal for athletes and others with high incomes. But to clarify Geoff’s statement of “NO state taxes”, I think you will find that the state of Florida does in fact collect revenues from its residents, even if that is not through standard methods.

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  4. HMT says:

    It sounds like the salary cap is “working as designed”. If good players are moving around based on “How can my talents be maximized for the most valuable wins”, instead of “which team can pay me the most $$” then an overall improvement to the game has been achieved.

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  5. James says:

    This article seems like an example of short-term thinking to me. I am not by any means a sports fan, but don’t the people who watch want to see competitive games? If only a handful of large-market teams can afford the best players, don’t the games between large- and small-teams (that is, most of them) become uninteresting one-sided affairs? As a consequence, doesn’t the league as a whole lose revenue, because few people watch those uninteresting games? Which means that it can no longer afford to pay large salaries to any player.

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    • theakinet says:

      “If only a handful of large-market teams can afford the best players, don’t the games between large- and small-teams (that is, most of them) become uninteresting one-sided affairs? As a consequence, doesn’t the league as a whole lose revenue, because few people watch those uninteresting games? Which means that it can no longer afford to pay large salaries to any player.”

      No. Research into fan behavior shows fans prefer “Super Teams.” Casual fans don’t have the time/interest in sorting through X # of teams to determine who’s good (worth watching) so they return to watching teams that were previously good. All leagues would make more money with less revenue (see foreign soccer), but they’d have to pay players closer to their real value, reducing profits (again, see foreign soccer, which is very close to a perfectly competive market).

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  6. Greg says:

    Very interesting article, but you can’t honestly expect us to take data seriously that says Tyson Chandler is responsible for 12.84 wins while Kevin Durant is only worth 9.45 …
    Also, wins should presumably be worth more to bigger market teams, as they get relatively more revenue from having a successful team than a small market team would (or at least I would think so).

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  7. Eleanor says:

    And how do you identify those players who produce wins beyond the wins produced formula, ones that work well as a team? Check out the Mutha Alagappan’s (Stanford) presentation on topic modeling at this year’s Sloan Conference.

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  8. John R says:

    bunk. Lebron could have gone to Chicago – a big market where he could contend. Ray Allen could have stayed in Boston – and been paid double – and he could contend. Didja catch that? the Celtics were able to offer him DOUBLE the salary he got with the Heat.

    Most of the players are soft and – imho – want to be “where its at” – be it taking their talents to South Beach or playing in the shadow of Hollywood. They’d like to be around their buddies and be able to play golf in the winter and rub elbows with all of the cool people. simple as that.

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