Measuring the efficiency of NBA teams: The effect of the change in salary cap Antonakis Theodoros A dissertation submitted in partial fulfillment of the requirements for the degree of Master of Science in Applied Economics & Data Analysis School of Economics and Business Administration Department of Economics Master of Science “Applied Economics and Data Analysis” August 2019 University of Patras, Department of Economics Antonakis Theodoros © 2019 − All rights reserved Three-member Dissertation Committee Research Supervisor: Kounetas Konstantinos Assistant Professor Dissertation Committee Member: Giannakopoulos Nicholas Associate Professor Dissertation Committee Member: Manolis Tzagarakis Assistant Professor The present dissertation entitled «Measuring the efficiency of NBA teams: The effect of the change in salary cap » was submitted by Antonakis Theodoros, SID 1018620, in partial fulfillment of the requirements for the degree of Master of Science in «Applied Economics & Data Analysis» at the University of Patras and was approved by the Dissertation Committee Members. I would like to dedicate my dissertation to my Research Supervisor, Kon- stantinos Kounetas, for his guidance and co-operation and to my parents for their support throughout my postgraduate studies. Acknowledgments I would like to express my sincere gratitude to Dr. Nickolaos G. Tzeremes, As- sociate Professor of Economic Analysis Department of Economics, University of Thessaly, for his support with modelling the two-stage DEA additive decomposi- tion procedure. Summary The aim of this dissertation is to use a two-stage DEA approach to perform an effi- ciency analysis of the 30 teams in the NBA. Particularly, our purpose is to estimate efficiency through a two-stage DEA process for NBA teams due to the increase of salary cap, in the first part and in second, the separation of teams based on the Conference (West-East) to which they belong, we estimate metafrontier and find- ing technology gaps. We decompose the overall team efficiency into two additive efficiencies: the first-stage salary cap efficiency that measures the effectiveness of transforming payrolls to on-court performance and the second-stage on-court ef- ficiency that measures the efficacy of transforming players’ on-court performance to a better winning rate and higher revenue. For this reason, 30 teams in the NBA are being tested for 18 seasons, from 2001-2002 season to 2018-2019. Empir- ical results show that teams belonging to the Western conference achieve higher overall efficiency than those in the East. Utah Jazz, San Antonio Spurs, Chicago Bulls, Atlanta Hawks, Golden State Warriors and Toronto Raptors are among the top efficient teams, whereas New York Knicks, Dallas Mavericks, Orlando Magic, Minnesota Timberwolves and New Orleans Pelicans rank among the lowest effi- cient teams. Regarding, the conference efficiency scores the empirical results show that on average the overall team efficiency scores range between 71.2% and 91.03% through the sample period. It is understood that the continuous increase in the salary cap has affected the performance of the teams to the best, and as shown the results, firstly there is an increase in efficiency scores over time as well as a decrease in the variation of efficiency which helps to develop the competitiveness of the teams. Keywords: Sports efficiency, NBA, two-stage DEA approach, Metafrontier, Salary cap i PerÐlhyh Σκοπός thc παρούsac διατριβής eÐnai h χρήση miac prosèggishc DEA δύο stadÐwn gia thn ανάλυση apotelesmατικόthtac twn 30 ομάδων sto NBA. IdiaÐtera, o σκοπός mac eÐnai na upologÐsoume thn apotελεσματικόthta mèsw miac diadikasÐac DEA δύο stadÐwn gia tic ομάδες NBA λόgw thc αύξησης tou salary cap, sto pr¸to mèroc kai δεύτεροn, ton diaqwriσμό twn ομάδων me βάση thn perifèreia (West-East) sthn opoÐa ανήκoun, εκτιμούμε ta metaβατικά όρια kai thn εξεύρesh ken¸n sthn teqnologÐa. AposuntÐjetai h sunoλική apodoτικόthta twn ομάδων se δύο πρόs- jetec αποδόσειc: h apodoτικόthta tou pr¸tou stadÐou (salary cap efficiency) pou μετρά thn apoτελεσματικόthta tou metasqhmatiσμού twn plhrwm¸n se επιδόseic sto γήπεδο kai th δεύτερο stάδιo (on-court efficiency) pou μετρά thn apoteles- ματικόthta twn paikt¸n na metatrèpoun thn απόδοση touc sto γήπεδο se nÐkec kai υψηλόtera èsoda. Gia to λόgo autό, 30 ομάdec sto NBA δοκιμάζοntai gia 18 σεζόn, από thn perÐodo 2001-2002 èwc to 2018-2019. Ta εμπειρικά apotelèsmata deÐqnoun όti oi oμάδες pou aνήκουν sth duτική perifèreia epiτυγχάνουν μεγαλύτερη suno- λική apoτελεσματικόthta από ekeÐnec sthn Anatoλή. H Utah Jazz, San Antonio Spurs, Chicago Bulls, Atlanta Hawks, Golden State Warriors, Toronto Raptors eÐnai apό tic pio apodotikèc ομάδες, en¸ oi New York Knicks, Dallas Mavericks, Orlando Magic, Minnesota Timberwolves, New Orlean Pelicans eÐnai oi ομάδες me thn χαμηλόterh apotelesmatikόthta. 'Oson αφορά ta apotelèsmata se epÐpedo perifèreiac, ta εμπειρικά apotelèsmata deÐqnoun όti katά mèso όρο oi sunolikèc ba- jmologÐec apotelesmatikόthtac twn ομάδων kumaÐnontai metαξύ 71,2% kai 91,03% katά th διάρκεια thc περιόδου tou deÐgmatoc mac. EÐnai katanohtό όti h suνεχής αύξηση tou salary cap èqei επηρεάsei tic epidόσειc twn ομάδων proc to kalύτερο kai, όπως faÐnetai από ta apotelèsmata, katαρχήν υπάρχει αύξηση thc apodoτικόthtac me thn πάροδο tou χρόnou, kaj¸c kai meÐwsh thc διακύμανσης thc apodoτικόthtac pou συμβάλλει sthn ανάptuxh thc antagwnisτικόthtac twn ομάδων. Keywords: Sports efficiency, NBA, two-stage DEA approach, Metafrontier, Salary cap i Contents 1 Introduction 1 2 Literature Review 5 3 Methodology 9 3.1 Additive efficiency decomposition approach in the two-stage process9 3.1.1 Two-stage DEA model: Constant returns to scale . 10 3.1.2 Two-stage DEA Model: Variable returns to scale . 15 3.2 Technology heterogeneity in NBA teams . 18 4 Data 19 4.1 Descriptive Statistics . 21 5 Empirical Results 23 5.1 Overall efficiency scores . 23 5.1.1 Salary cap and on-court efficiency . 28 5.2 Efficiency scores by Conference . 30 5.2.1 Salary cap and on-court efficiency by conference . 35 5.3 Technology Gap . 36 6 Conclusions 39 Appendix A Overall team performance scores 42 Appendix B Efficiency scores by Conference 62 Appendix C Technology gap 82 References 100 ii List of Tables 1 Summary statistics of empirical data . 21 2 Number of avg. wins, attendance and team performance by Con- ference . 22 3 Overall team performance scores . 24 4 Overall team performance scores . 25 5 Conference team performance scores . 30 6 Conference team performance scores . 32 7 Technology Gap . 37 A.1 Overall team performance scores . 42 B.1 Efficiency score over East conference . 62 B.2 Efficiency scores over West conference . 72 C.1 Technology gap . 82 iii List of Figures 1 Two-stage framework of overall team performance . .3 2 Relationship between Team Salary Cap and Team Performance . 22 3 Overall efficiency and stage efficiency versus Wins . 26 4 Boxplot of Overall and Stage efficiency by Conference . 27 5 Kernel Density of overall efficiency and stage efficiency through time 27 6 Conference efficiency and stage efficiency versus salary cap . 33 7 Boxplot of Conference and Stage efficiency by Conference . 33 8 Kernel Density of conference efficiency and stage efficiency through time . 34 iv Chapter 1 Introduction National Basketball Association (NBA) is one of the four major professional sports leagues in the United States and Canada and it is widely considered to be the pro- fessional basketball league in the world due to popularity, advertising and broad- casting rights. According to Forbes, total revenue across the organization reached $8 billion last season. Each one of the teams is worth at least $1 billion, and a team is worth on average $1.9 billion for last year, about three times the valuation from just five years ago. NBA broadcasts 277 regular season games nationally per year plus 90 or so playoff games. TV accounts for most of the NBA’s revenue. For the 2016-2017 sea- son, TNT and ESPN reached an agreement with the NBA by signing a $ 24 billion TV rights deal. Furthermore, national TV contracts produce enough revenue to shelter salaries. However, those national contracts still leave 1078 regular-season games unaccounted for. Filling in that gap, local TV contracts can gross between $120 million and $150 million annually. The top five markets outside the U.S. as of the end of the 2017-18 season were China, Australia, Brazil, Canada, and Mexico. In Europe, the UK is the No. 1 market for NBA spectators, followed by Germany and France. For the first time in the NBA’s history, teams attempted to place sponsors on their jerseys thus increasing team’s net profits by $9.3 million annually. According to ESPN, for the 2018-2019 season, teams saw an average 1 attendance from just under 15,000 to just over 20,000 per home game. With tick- ets costing close to $100 on average brought in revenue of between $1.5 and $2 million. Calculating all the above creates the total budgets of the teams, which are dif- ferent for each team. For this reason and to avoid any issues of unfair competition, the NBA Organizing Committee established the salary cap. The NBA salary cap is the limit to the total amount of money that National Basketball Association teams can pay their players. Such as various professional sports leagues, the NBA has a salary cap to control costs and benefit parity, de- fined by the league’s collective bargaining agreement (CBA). This limit is subject to a complex system of rules and exceptions and is calculated as a percentage of the league’s revenue from the previous season. Under the CBA approved in July 2017, the cap will continue to differ in forthcoming seasons based on league revenues. For the 2019–20 season, the cap is set at $109.14 million. To ensure the players get their share of the basketball-related income (BRI), teams are required to spend 90 percent of the salary cap each year, the salary floor for the 2019–20 season is $98.226 million.