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Termination Risk and Agency Problems: Evidence from the NBA

Alma Cohen, Nadav Levy, Roy Sasson

NBER Working Paper No. 24708
Issued in June 2018
NBER Program(s):Law and Economics Program, Labor Studies Program

When organizational structures and contractual arrangements face agents with a significant risk of termination in the short term, such agents may under-invest in projects whose results would be realized only in the long term. We use NBA data to study how risk of termination in the short term affects the decision of coaches. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA’s 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse.

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Document Object Identifier (DOI): 10.3386/w24708

Published: Alma Cohen & Nadav Levy & Roy Sasson, 2018. "Termination Risk and Agency Problems: Evidence from the NBA," Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(4), pages 579-618. citation courtesy of

 
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