The effect of competition on the demand for skilled labor: Matching with externalities in the NBA

Joseph Kuehn

Journal of Economics & Management Strategy, 2024, vol. 33, issue 3, 539-581

Abstract: I study how heterogeneity in competition can affect the demand for skilled labor in a way that generates a dispersion in productivity across otherwise similar firms. This is explored in the setting of professional basketball where heterogeneity in competition is easily measured. I develop and estimate a matching model with externalities, where the value of a match between a firm and worker depends on the entire allocation of matches. I find that competition has a significant effect on hiring decisions in the National Basketball Association, resulting in a clustering of talent among rivals. A counterfactual shows that competition in the league's playoff format explains 17.59% of the widely observed gap in talent between the league's two conferences.

Date: 2024
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