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Benjamin Campbell, Ohio State University David Kryscynski, Brigham Young University

Utility Players & Utility Functions: How compensating differentials affect rent appropriation in the NBA. Benjamin Campbell, Ohio State University David Kryscynski, Brigham Young University Russ Coff, Wisconsin School of Business. Firm-Specific Human Capital and Competitive Advantage.

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Benjamin Campbell, Ohio State University David Kryscynski, Brigham Young University

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  1. Utility Players & Utility Functions:How compensating differentials affect rent appropriation in the NBA Benjamin Campbell, Ohio State University David Kryscynski, Brigham Young University Russ Coff, Wisconsin School of Business

  2. Firm-Specific Human Capital and Competitive Advantage • Unique capabilities drive heterogeneous performance – these, in turn, draw on Firm-Specific human capital (FSHC) and knowledge. • Shared rents (bilateral monopoly w/firm & worker) • Specificity: Skills are more valuable in one firm • Gap between opportunity cost and use value at that firm • Firm may capture rent beyond the opportunity cost • Investment problem in FSHC. • Employee reluctance to incur direct & opportunity costs • Holdup hazard: Gains must justify the investment

  3. Hometown Heroes: FS human assets in the NBA • Firm-Specific value created: • Hometown status increases player popularity & revenue: For Carmelo Anthony’s 1st game w/his hometown NY Knicks StubHub ticket prices tripled. • Gap between opportunity cost (other teams) & use value • FSHC? Is it a skill? Its firm-specific & embedded in people… • Bi-lateral monopoly: Rent is shared. H1a: “Stars” earn more on moving to their home state H1b: “Stars” earn less on moving from their home state H1c: “Stars” earn more when staying in their home state

  4. Compensating Wage Differentials

  5. Compensating Wage Differentials and FSHC Investment Benefits • Compensating wage differentials: • Undesirable work commands a wage premium • Preferred work may be linked to lower wages • FSHC can have positive utility • A firm’s mission, culture, or the work itself may be valued • Obtaining FSHC can be enjoyable (social networks, etc.) • This is part of the value employees can appropriate • Appropriation by the firm. More financial value arising from FSHC flows to the firm (or other stakeholders in the firm).

  6. Derrick Rose to the Occasion & Got a 5 yr Contract w/the Bulls “I'll be able to afford what I want. But not too many things excite me, except winning and being around my family” -Derrick Rose (Bulls), December 2011 "That's like the ultimate dream at the end of the day. Who wouldn't want to go back home to play?" -Carmelo Anthony (Knicks), January 2011

  7. Hometown Heroes and FS Utility • Firm-Specific utility created: • “Heroes” enjoy status and visibility • Live near friends and family • Other firms cannot provide this source of utility • Compensating differentials: Substitution between wages & utility. H2a: Players take lower wages to move to their home state H2b: Players require a wage premium to move from their home state H2c: Players take lower wages to stay in their home state

  8. Everyone Loves a Winner • Positive utility. Players prefer to play on a winning team. But, utility and skills are not firm-specific. • Derrick Rose (earlier) • Lebron James’ move to Miami taking a $15M pay cut. • Compensating differentials. Does positive utility allow owners to appropriate more financial returns? H3a: Players accept wage discounts to move to a playoff bound team. H3b: Players require a premium to move to a team that’s not playoff bound. H3c: Players accept wage discounts to stay at a playoff bound team.

  9. Training Camp: A Few Measures • Sample: 626 NBA players 2000-2009 (2234 player-yrs) • DV: “Rent” = salary – Ŝ (e.g., opportunity cost) • Independent variables: • Homeward move: ToHome=arriving hero, FromHome=leaving hero. • Playoff move:ToPlayoff=better team, FromPlayoff= worse team. • Stay in a good situation: StayHome, StayPlayoff • Star (starts over ½ of the games) (n=367) • Controls: • Lagged salary  Person/team fixed effects • Mobility (baseline effect)  Age, Age2 • Offensive/defensive ratingYear • Minutes played  Position

  10. Show Me the Money When Movinga a Fixed effects panel regression. Significant controls : Year/team dummies, team value, lagged salary, minutes played, rating, age.

  11. Robustness: Any fouls? • Fixed/random effects. Stronger findings for random effects. Pay reduction for moving away from a playoff team (might be involuntary) • Cutoffs to define stars. Games started, Minutes played, Efficiency rating. “Winning” results are more robust. • Wage ∆. Similar results for annual salary change. • Do moves alter performance? Not generally. Moving to a playoff team increases performance but average pay is lower for such moves.

  12. Alley-Oop at the Buzzer • Good moves … for less money. Lower pay for moves that increase utility (home & winners). • Staying power. Stars appropriate hometown value over time. Winners share the rent over time. • Strategy for the next game: • A theory of rent must incorporate utility… • How do firms manage utility/pay tradeoffs? • When do workers realize both financial & non-financial returns? (scarcity? temporal specificity? Fairness?)

  13. Market Frictions and General Human Capital

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