Thursday, September 5, 2013
Economists vs. tanking: Brian Soebbing
By Brian Soebbing
Garrett Ellwood/ NBAE/ Getty Images
LeBron James' value during his rookie deal far exceeded his salary.
Historically, most of the discussion surrounding tanking in the NBA has centered on the NBA amateur draft. Even though drafts are anti-competitive in nature (i.e., amateur players can only negotiate with the team that drafted them and nobody else), one of the rationales leagues give for a reverse-order amateur draft is competitive balance, all member teams have equal playing strength throughout the short and long-term. Many times competitive balance and uncertainty of game outcome work together (i.e., a policy that increases uncertainty of outcome also increases competitive balance). However, tanking and the amateur draft is one instance, historically, where these two concepts diverge. This is one reason that tanking is a complex phenomenon and a difficult one for league executives.
There are two main areas of academic research in regards to tanking and the NBA draft. The first is looking at financial incentives to tank. I coauthored a paper in 2010 (Journal of Sports Economics) with Drs. Joseph Price, David Berri, and Brad Humphreys looking at financial incentives to tank. Examining NBA drafts from 1992 to 2007, we estimated that the average value of the first overall pick in the draft was approximately $4.3 million. In addition to the overall dollar value, we also estimated that first overall picks on average produced 7.2 wins in the first season and 45 wins over the first five seasons of their career. Hence, these players are productive and valuable on average throughout the period.
The second area of research looks at whether and to what extent teams tank under different formats. To summarize the findings from multiple papers (including the one above), there were mixed findings in regards to the reverse-order draft format, no tanking under the equal probability format, and tanking returning under both weighted probability formats. For example, if you are non-playoff team and were going to have the same chance as the worst team overall in regards to receiving the first overall selection, there is no incentive to tank.
In summary, the NBA has been trying to balance uncertainty of outcome and competitive balance in regards to the draft over the last 30 years, and have previously adopted a measure to eliminate tanking -- the equal probability or “unweighted” draft format.
Rookie scale adds appeal to tanking
Aside from lottery format, there’s another important factor to consider: the rookie salary scale, which limits the amount of money a first round draft pick earns in his first five seasons in the league. For instance, the first pick in the NBA draft will earn approximately $4.6 million. This value will increase to over $8 million in the final year of the contact. If the player performs to his potential -- or even comes close -- this usually gives the team “a surplus,” which we can define as the amount of revenue a player produces for the team minus the salary paid to him by the team.
Consider a superstar like LeBron James. The value of his production for the Cleveland Cavaliers during his rookie deal far exceeded his salary. In the research stated prior with Drs. Price, Berri, and Humphreys, one-third of the first overall picks were identified as superstars. Thus, a team may conclude that the reward for tanking under the rookie salary scale far outweighs the risk. If we eliminated these pre-ordained rookie scale contracts, we’d also eliminate a considerable amount of the incentive for teams to tank in order to acquire these players at below market value.
Play for the pick
One “radical” measure would be to have a tournament that determines the number one overall selection. This tournament would consist of all non-playoff teams and could occur during the playoffs. The draft lottery slots are determined based upon the results in tournament. The winner of the tournament selects first, the loser of the championship game would select second, etc.
The format regarding length and home court would be the key deciding factors and these decisions would be a discussion regarding the purpose of the draft (reduce tanking or competitive balance). For example, playing the game at the worst non-playoff team's home court would side towards competitive balance given the NBA’s strong home court advantage, as would a short tournament format (winner take all or best-of-three). A neutral location for a tournament and a longer format (e.g., best-of-seven) would veer more towards reducing tanking. In theory, this would provide a competitive element of determining the draft format while also providing a sense of excitement for fans of these teams going into the off-season and the beginning of ticket sales for the upcoming seasons.
Dr. Brian Soebbing is an assistant professor in sport management within the Department of Kinesiology at Louisiana State University. His main research focus is on the strategic behavior of sports leagues and teams both at the amateur and professional level.