a blog

by Josh Nicholas

Papers

Paying players pays

Is Stephen Curry actually worth more than $30 million a year? How about Lebron James, Russell Westbrook or James Harden?

Five Thirty Eight make a pretty good case that NBA superstars are generally underpaid, relative to what they would earn in an open market.

But that analysis is based on their impact on the court.

This is the top-heavy nature of production in the NBA, and why superstars are so valuable just as a basic bookkeeping cheat code: They create surplus value for their teams (and more generally the league as a whole) that is funneled into less productive players.

What is the business case for paying Stephen Curry >$30 million?

Well, according to a paper by Harrison Li at Berkeley, both superstars and wins add to the bottom line.

..every extra win during the season will bring in .3% more revenue to a team. To put this into context, each individual win for a team like the Los Angeles Lakers, who gained about 214 million dollars in revenues this past year, brought in about 642,000 dollars.

As only five players take the court at a time, one person can have a huge impact on winning. More wins mean more people coming to the games (yay bandwagon fans).

It also means teams can charge more for season tickets and premium seats, and more lucrative local television deals (something a lot of teams depend on). Of course, not all of this is realised immediately. Television deals, for example, are negotiated only every few years.

When the Boston Celtics (my team) added superstars Ray Allen and Kevin Garnett in 2007 the team's salary went up by $25.5 million. But Li estimates revenue increased by over $40 million due to the extra wins and playing more games (thanks to making the playoffs and winning the championship).

So it seems like paying players does pay. Although this paper is a bit old now. It would be interesting to see some fresh analysis, accounting for the new collective bargaining agreement and stratospheric increases in the salary cap.

It's about fairness, not equality.

"...there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness."

This is from a paper published in Nature.

"Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality."

This is a really short paper, but the examples are pretty amazing. It is a really subtle difference they are trying to highlight, but the implications are huge.

One example has six year-olds distributing erasers to boys who had cleaned up a room. Given an odd number of erasers, they chose to throw out the surplus rather than have an unequal distribution. This obviously leads to the conclusion that equality is important even among children.

But a follow up study found that the children had no qualms about an unequal distribution when they were told that one of the boys had worked harder. This leads to the conclusion that fairness, in fact, is the objective. And it's backed up by numerous examples, including that we are willing to cop inequality when the cause is chance.

"We suggest that the perception that there is a preference for equality arises through an undue focus on special circumstances, often studied in the laboratory, where inequality and unfairness coincide. In most situations, however, including those involving real world distributions of wealth, people’s concerns about fairness lead them to favour unequal distributions."

It seems that what really triggers us is the process, not the outcomes.

"It follows, then, that if one believes that (a) people in the real world exhibit variation in effort, ability, moral deservingness, and so on, and (b) a fair system takes these considerations into account, then a preference for fairness will dictate that one should prefer unequal outcomes in actual societies."