Termination Risk and Agency Problems: Evidence from the NBA

Alma Cohen, Nadav Levy and Roy Sasson

No 24708, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When organizational structures and contractual arrangements face agents with a significant risk of termination in the short term, such agents may under-invest in projects whose results would be realized only in the long term. We use NBA data to study how risk of termination in the short term affects the decision of coaches. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA’s 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse.

JEL-codes: D20 J44 K00 L83 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-cdm, nep-hrm, nep-law, nep-lma and nep-spo
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Published as Alma Cohen & Nadav Levy & Roy Sasson, 2018. "Termination Risk and Agency Problems: Evidence from the NBA," Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(4), pages 579-618.

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