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The Effect of NBA Free Agency on Player Utility South Dakota State University Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange Theses and Dissertations 2016 The ffecE t of NBA Free Agency on Player Utility Austin Erikson South Dakota State University, [email protected] Follow this and additional works at: http://openprairie.sdstate.edu/etd Part of the Economic Theory Commons, and the Sports Studies Commons Recommended Citation Erikson, Austin, "The Effect of NBA Free Agency on Player Utility" (2016). Theses and Dissertations. Paper 1035. This Thesis - Open Access is brought to you for free and open access by Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of Open PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contact [email protected]. THE EFFECT OF NBA FREE AGENCY ON PLAYER UTILITY BY AUSTIN ERIKSON A thesis submitted in partial fulfillment of the requirements for Master of Science Major in Economics South Dakota State University 2016 iii To my father, the person who first discovered this research problem. Your unimaginable work ethic has always motivated me to be more than what I think possible. You love for your family is obvious to all, second only to your love for God. Your selflessness in all things is uplifting, and the fact that you put everyone else first is inspiring. I’ve always known you are my hero, and I’m reminded of why every day. Thank you for my life, your love, and the example that you set. I hope to honor you in the life that I live. This research is for you. iv ACKNOWLEDGEMENTS First, I would like to thank South Dakota State University for granting me an assistantship that funded my graduate research. Multiple sources were responsible for my funding, including Federal Hatch Funds and SD DOR AgLand. Their financial support allowed me time and energy to focus on research. To Dr. George Langelett, my Thesis Advisor, I want to express my deepest gratitude. His guidance, support, expertise, persistence, and encouragement were paramount in my success. Working with you has been an honor and a pleasure. I wish to thank Dr. Zhiguang (Gerald) Wang for his participation on my Thesis Committee. Gerald, your mentorship in both finance and life has improved my experience at SDSU, and I believe your contributions will assist me wherever I go in life. A sincere thank you to Dr. Julie Yingling, whose selfless act will never be forgotten. I want to thank Dr. David Davis, who continually helped me both in and out of the classroom. Without your assistance I would have never had time to complete my research (your mastership in Stata was a thrill to witness). Thanks to Rita Voeller for her patience, continued assistance, and friendship, without which I surely would have become lost. My appreciation goes out to all of the Economics Department faculty and staff who helped me along the way, giving me the chance to succeed. Finally, I am thankful for my friends whose encouragement never faltered. Their emotional support carried me through the finish line. v CONTENTS ABBREVIATIONS ....................................................................................................................... vii LIST OF TABLES ........................................................................................................................ viii ABSTRACT .................................................................................................................................... ix CHAPTER 1: INTRODUCTION ................................................................................................. 1 BACKGROUND ......................................................................................................................... 6 NBA SALARY CAP AND FREE AGENCY TECHNICAL INFORMATION ..................... 6 FACTORS OF A FREE AGENCY DECISION .................................................................. 15 CHAPTER 2: LITERATURE REVIEW ................................................................................... 29 A BRIEF HISTORY ON FREE AGENCY IN THE NBA ........................................................ 29 1. PLAYER PERFORMANCE ................................................................................................. 31 A. THE IMPACT OF CHANGING TEAMS ON PERFORMANCE ................................. 31 2. PLAYER CONTRACTS ....................................................................................................... 34 A. FREE AGENTS IN THE NATIONAL FOOTBALL LEAGUE .................................... 34 B. CONTRACTS BASED ON PAST PERFORMANCE IN THE MLB ............................ 35 C. SALARY DISCRIMINATION BY NATIONALITY IN THE NBA ............................... 38 D. TAX INFLUENCES ON NBA FREE AGENCY ............................................................ 40 3. STARS IN THE NBA ............................................................................................................ 42 4. THE EFFECT OF EXTRINSIC INCENTIVES .................................................................... 44 CONCLUSION .......................................................................................................................... 48 CHAPTER 3: CONCEPTUAL FRAMEWORK ...................................................................... 52 CONCEPTUAL METHOD .................................................................................................... 55 RESEARCH DESIGN ............................................................................................................... 56 HYPOTHESES: .................................................................................................................... 57 METHODOLOGY: ............................................................................................................... 60 SUMMARY ........................................................................................................................... 66 CHAPTER 4: RESULTS ............................................................................................................ 67 PER RESULTS: POPULATION ............................................................................................... 74 CONTRACT RESULTS: POPULATION ................................................................................ 78 PER RESULTS: SUB-POPULATION ...................................................................................... 82 CONTRACT RESULTS: SUB-POPULATION ....................................................................... 85 CHAPTER 5: DISCUSSION ...................................................................................................... 89 PER RESULTS: POPULATION ............................................................................................... 90 vi CONTRACT RESULTS: POPULATION ................................................................................ 93 PER RESULTS: SUB-POPULATION ...................................................................................... 95 CONTRACT RESULTS: SUB-POPULATION ....................................................................... 97 CHAPTER 6: CONCLUSION .................................................................................................. 104 REFERENCES ........................................................................................................................... 108 vii ABBREVIATIONS NBA National Basketball Association CBA Collective Bargaining Agreement BRI Basketball Related Income PPG Points per Game NBPA National Basketball Player’s Association UFA Unrestricted Free Agent RFA Restricted Free Agent NFL National Football League MLB Major League Baseball PER Player Efficiency Rating S Starter E Experience FAS Free Agent Stayed G Guard F Forward SF Small Forward PF Power Forward C Center PER t PER Decision Year Contract t Contract Decision Year PER t-1 PER Pre Contract t-1 Contract Pre viii LIST OF TABLES Table 1: Original Data ................................................................................................................... 57 Table 2: Used Data ......................................................................................................................... 57 Table 3. Regression 1 ..................................................................................................................... 74 Table 4. Regression 2 ..................................................................................................................... 78 Table 5. Regression 3 ..................................................................................................................... 82 Table 6. Regression 4 ..................................................................................................................... 85 ix ABSTRACT THE EFFECT OF NBA FREE AGENCY ON PLAYER UTILITY AUSTIN ERIKSON 2016 Observably, free agents in the National Basketball Association often make misguided decisions during the free agency period. These decisions may have a direct effect on a player’s performance and salary, affecting their overall utility. Research exists confirming that moving through free agency leads to an effect on player performance, but no study has explored the effect of changing teams through free agency on a player’s salary. As a significant number of players enter this market every year, research on this
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