Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

The Matching Economics of NBA Free Agency

by Luki Elizalde

 

Every year, the National Basketball Association goes through the annual free agency period, during which teams make offers to players with no contractual obligations. Each team is allocated a certain salary cap that allows them to sign players until they spend that amount. This year, the amount was $67 million, but is set to increase to $70 million next season. This number is not necessarily a strict cap; exceptions can be made to go over this budget. The current NBA free agency market hasn’t been efficient in allowing players to move and teams to grow. The consistent increase of the salary cap, inconsistent restrictions on free agents, and verbal agreements between players and teams have enabled some organizations to consolidate talent, and have left other teams with holes in their team’s rosters. In the case for players, the market caters to the league’s top talent and makes it difficult for mid and low-level players to find a contract to sign in the off-season.

The NBA’s salary cap, considering the numerous exceptions that can be made to go over the limit, is in fact not much of a cap at all. An example of this would be the “soft cap.” According to the NBA, the soft cap “contains exceptions which allow teams to sign players or make trades that exceed the cap under certain conditions. In practice, very few NBA teams are ever under the cap during a season.” It helps teams retain current players, and allows teams to go over the suggested limit and sign players that have been on the roster for a lengthy time. Some examples of viable excuses for exceeding the salary cap are as follows:

1.     The Larry Bird Exception: This allows teams to sign current players up to a max contract if they’ve played on the same team for three consecutive years.

2.     The Early Bird Exception: This allows teams to sign players who have completed a two-year contract to another two-year, restricted free agent contract. The value of this contract cannot be more than 175% of the previous one.

3.     The Non-Bird Exception: This applies to players who neither qualify for the Larry Bird Exception nor the Early Bird Exception, or had those rights waived by their current team. Organizations are allowed to sign players to a contract of four years or less, and the value of this contract cannot be more than 120% of the previous one.

4.     The Rookie Exception: This allows teams to sign first-round draft picks, even if the contract goes over the cap.

These exceptions are most significant for mid-level or low-level players that are trying to remain in the league. Without this cut, players of that caliber would be cut or making less than their true value. In a sense, these exceptions allow players to build a more substantial relationship with their current team and fan base; no one likes to see a superstar leave due to a lack of cap room. This also, however, affects the distribution of talent and allows good teams to retain good players for a longer amount of time, slowing down the cyclical tendency of the league and pushing it further from being competitive overall.

Star players have begun to use the Bird Exception in order to restructure their contracts and increase their salary. This has led to organizations exercising “team options” on mid-level players. These options allow teams to decide to continue a player’s contract, or to terminate it at a predetermined point. For example, a four-year contract with three-year team option means that a team could terminate the mid-level player’s contract after the third year. Contrastingly, star players typically sign a “player option,” in which they get to determine whether or not they will continue to fulfil their contract. A four-year contract with three-year player option means that a player could terminate his contract after the third year, which could leave teams scrambling to replace a franchise cornerstone.

Another issue with the league is that some teams are simply located in more desirable cities than others, giving them an unsolvable advantage in signing top free agents. The externalities that come with playing in a big city for an established franchise are incomparable, so much so that these teams don’t even rely on the draft to rebuild. Instead, they make trades or acquisitions based on a “win now” mentality. This forces small-market teams to find a potential star through the draft because top talent free agents wouldn’t consider moving to a city that wouldn’t directly improve their brand and give them primetime television coverage.

This isn’t to say that being located in a big city guarantees success. Consider the New York Knicks and Los Angeles Lakers. Both teams are historic franchises and, according to Forbes.com, are the two most valuable franchises in the NBA. Both teams, however, have failed to make the playoffs the past three seasons due to trading draft picks for established players.

Considering the league can’t uproot franchises and move them to larger-market cities, there are no remedies to this issue. The only way small-market teams become attractive is when they’re on the verge of winning a championship. The prospect of winning a championship ring may be the only thing that would convince a superstar to join this kind of team. In 2015, David West gave up a $10 million contract and left the Indiana Pacers to join a small-market team, the San Antonio Spurs, who have a high chance to contend for the title. But in many cases, stars leave the small-market team that drafted them to head to bigger cities without ever looking back. Other than the anomaly of the Spurs, a small-market team hasn’t lifted the NBA trophy since the Portland Trailblazers in 1977.

The current market in which NBA free agency operates has not worked in following its purpose: keep the league competitive and keep players on rosters. Instead, it has led to the best teams remaining successful for a longer period of time by gaming the system with soft cap exceptions and a constant increase in the salary cap. In addition to this, the repugnance and regulation of the restricted free agency market makes it more difficult for players to move from team to team if they are unhappy, while unrestricted free agents commonly get overlooked due a high search cost that most teams aren’t willing to give up.

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