IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v61y2021i6d10.1007_s00181-020-01996-z.html
   My bibliography  Save this article

Sunk costs in the NBA: the salary cap and free agents

Author

Listed:
  • Quinn Keefer

    (California State University San Marcos)

Abstract

The previous research on the role sunk costs play in the National Basketball Association (NBA) has come to mixed conclusions. We use a direct measure of sunk costs, player compensation, and a quasi-experimental method that considers the endogenous relationship between compensation and productivity. Using the spike in salary cap for the 2016–2017 season, from new television broadcasting contracts, we find compensation has a significant effect on playing time. Specifically, we use players signing free agent contracts in 2015–2016 or 2016–2017. For both groups, we analyze the change in salary from the pre-contract season to the post-contract season. Using the difference-in-differences, we find the inflated salary cap, from the new television contracts, increased player compensation by 81.7%, on average. Instrumental variables estimations show the increase in compensation significantly affects playing time. The change in salary yields an additional 1.93 min played per game, which is approximately equal to the effect of a one-standard deviation increase in contemporaneous productivity. Furthermore, we find that our conclusions are robust to the use of various advanced analytical measures or traditional box-score statistics.

Suggested Citation

  • Quinn Keefer, 2021. "Sunk costs in the NBA: the salary cap and free agents," Empirical Economics, Springer, vol. 61(6), pages 3445-3478, December.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:6:d:10.1007_s00181-020-01996-z
    DOI: 10.1007/s00181-020-01996-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-020-01996-z
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00181-020-01996-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Camerer, Colin F. & Weber, Roberto A., 1999. "The econometrics and behavioral economics of escalation of commitment: a re-examination of Staw and Hoang's NBA data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(1), pages 59-82, May.
    2. Heath, Chip, 1995. "Escalation and De-escalation of Commitment in Response to Sunk Costs: The Role of Budgeting in Mental Accounting," Organizational Behavior and Human Decision Processes, Elsevier, vol. 62(1), pages 38-54, April.
    3. Kogut, Carl A., 1990. "Consumer search behavior and sunk costs," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 381-392, December.
    4. Quinn Keefer, 2015. "Performance Feedback Does Not Eliminate the Sunk-Cost Fallacy: Evidence From Professional Football," Journal of Labor Research, Springer, vol. 36(4), pages 409-426, December.
    5. Alexander Hinton & Yiguo Sun, 2020. "The sunk-cost fallacy in the National Basketball Association: evidence using player salary and playing time," Empirical Economics, Springer, vol. 59(2), pages 1019-1036, August.
    6. David J. Berri & Anthony C. Krautmann, 2006. "Shirking on the Court: Testing for the Incentive Effects of Guaranteed Pay," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 536-546, July.
    7. Li Jin & Anna Scherbina, 2011. "Inheriting Losers," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 786-820.
    8. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    9. Daniel M. Leeds & Michael A. Leeds & Akira Motomura, 2015. "Are Sunk Costs Irrelevant? Evidence From Playing Time In The National Basketball Association," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1305-1316, April.
    10. Keefer, Quinn A.W., 2019. "Decision-maker beliefs and the sunk-cost fallacy: Major League Baseball’s final-offer salary arbitration and utilization," Journal of Economic Psychology, Elsevier, vol. 75(PB).
    11. Anthony C. Krautmann & John L. Solow, 2009. "The Dynamics of Performance Over the Duration of Major League Baseball Long-Term Contracts," Journal of Sports Economics, , vol. 10(1), pages 6-22, February.
    12. Borland, Jeff & Lee, Leng & Macdonald, Robert D., 2011. "Escalation effects and the player draft in the AFL," Labour Economics, Elsevier, vol. 18(3), pages 371-380, June.
    13. Teck-Hua Ho & I. P. L. Png & Sadat Reza, 2018. "Sunk Cost Fallacy in Driving the World’s Costliest Cars," Management Science, INFORMS, vol. 64(4), pages 1761-1778, April.
    14. Quinn A. W. Keefer, 2017. "The Sunk-Cost Fallacy in the National Football League," Journal of Sports Economics, , vol. 18(3), pages 282-297, April.
    15. David R Just & Brian Wansink, 2011. "The Flat-Rate Pricing Paradox: Conflicting Effects of "“All-You-Can-Eat"” Buffet Pricing," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 193-200, February.
    16. Anthony C. Krautmann & Thomas D. Donley, 2009. "Shirking in Major League Baseball Revisited," Journal of Sports Economics, , vol. 10(3), pages 292-304, June.
    17. Quinn A. W. Keefer, 2019. "Do sunk costs affect expert decision making? Evidence from the within-game usage of NFL running backs," Empirical Economics, Springer, vol. 56(5), pages 1769-1796, May.
    18. Joel G. Maxcy & Rodney D. Fort & Anthony C. Krautmann, 2002. "The Effectiveness of Incentive Mechanisms in Major League Baseball," Journal of Sports Economics, , vol. 3(3), pages 246-255, August.
    19. Hackinger, Julian, 2019. "Ignoring millions of Euros: Transfer fees and sunk costs in professional football," Journal of Economic Psychology, Elsevier, vol. 75(PB).
    20. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Quinn Andrew Wesley Keefer, 2021. "Did the 2011 Change to NFL Rookie Compensation Alter How Sunk Costs Affect Utilization?," Journal of Sports Economics, , vol. 22(4), pages 387-411, May.
    2. Keefer, Quinn A.W., 2019. "Decision-maker beliefs and the sunk-cost fallacy: Major League Baseball’s final-offer salary arbitration and utilization," Journal of Economic Psychology, Elsevier, vol. 75(PB).
    3. Quinn A. W. Keefer, 2019. "Do sunk costs affect expert decision making? Evidence from the within-game usage of NFL running backs," Empirical Economics, Springer, vol. 56(5), pages 1769-1796, May.
    4. Alexander Hinton & Yiguo Sun, 2020. "The sunk-cost fallacy in the National Basketball Association: evidence using player salary and playing time," Empirical Economics, Springer, vol. 59(2), pages 1019-1036, August.
    5. Hackinger, Julian, 2019. "Ignoring millions of Euros: Transfer fees and sunk costs in professional football," Journal of Economic Psychology, Elsevier, vol. 75(PB).
    6. Quinn Keefer, 2015. "Performance Feedback Does Not Eliminate the Sunk-Cost Fallacy: Evidence From Professional Football," Journal of Labor Research, Springer, vol. 36(4), pages 409-426, December.
    7. Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garrett Milam & Bernardo Huberman, 2007. "Searching for the sunk cost fallacy," Experimental Economics, Springer;Economic Science Association, vol. 10(1), pages 79-104, March.
    8. Joshua M. Congdon-Hohman & Jonathan A. Lanning, 2018. "Beyond Moneyball," Journal of Sports Economics, , vol. 19(7), pages 1046-1061, October.
    9. Joshua D. Pitts & Brent A. Evans, 2023. "New contracts and dismissal threats from highly drafted rookies: What motivates NFL quarterbacks?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 4-16, January.
    10. Sezer Ülkü & Chris Hydock & Shiliang Cui, 2020. "Making the Wait Worthwhile: Experiments on the Effect of Queueing on Consumption," Management Science, INFORMS, vol. 66(3), pages 1149-1171, March.
    11. Steven Salaga & Brian M. Mills & Scott Tainsky, 2020. "Employer-Assigned Workload and Human Capital Deterioration: Evidence From the National Football League," Journal of Sports Economics, , vol. 21(6), pages 628-659, August.
    12. Richard J. Paulsen, 2018. "Contract Options and Performance: The Case of Major League Baseball," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(4), pages 379-388, December.
    13. Quinn A. W. Keefer, 2017. "The Sunk-Cost Fallacy in the National Football League," Journal of Sports Economics, , vol. 18(3), pages 282-297, April.
    14. Ronayne, David & Sgroi, Daniel & Tuckwell, Anthony, 2021. "Evaluating the sunk cost effect," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 318-327.
    15. Negrini, Marcello & Riedl, Arno & Wibral, Matthias, 2022. "Sunk cost in investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1105-1135.
    16. Fumarco, Luca & Longley, Neil & Palermo, Alberto & Rossi, Giambattista, 2024. "Strategic Behaviours in a Labour Market with Mobility-Restricting Contractual Provisions: Evidence from the National Hockey League," GLO Discussion Paper Series 1401, Global Labor Organization (GLO).
    17. Berg, Joyce E. & Dickhaut, John W. & Kanodia, Chandra, 2009. "The role of information asymmetry in escalation phenomena: Empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 135-147, February.
    18. Hoelzl, Erik & Loewenstein, George, 2005. "Wearing out your shoes to prevent someone else from stepping into them: Anticipated regret and social takeover in sequential decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 98(1), pages 15-27, September.
    19. Duncan James & Daniel Friedman & Christina Louie & Taylor O'Meara, 2018. "Dissecting The Monty Hall Anomaly," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1817-1826, July.
    20. Dimuthu Ratnadiwakara & Vijay Yerramilli, 2022. "Do Sunk Costs Affect Prices in the Housing Market?," Management Science, INFORMS, vol. 68(12), pages 9061-9081, December.

    More about this item

    Keywords

    Sunk cost; Playing time; Compensation; National Basketball Association;
    All these keywords.

    JEL classification:

    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • Z22 - Other Special Topics - - Sports Economics - - - Labor Issues

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:61:y:2021:i:6:d:10.1007_s00181-020-01996-z. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.