Sports fans often talk about the "contract year effect" – the idea that a player plays really hard in the final year of a contract, signs the big contract, then reverts to poor play (shades of Mark Blount anyone?).  As sports fans we also wonder about free agents: why didn’t the original team retain their services? Are they a bad seed? Not a team player? Do they have bad habits no other team knows about? 

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With the first pick in the NBA draft, the Portland TrailBlazers earn the right to negotiate with Greg Oden. However, as we've learned in the last few days, there is some pressure for the Blazers to also draft Mike Conley, Jr. The problem is that Conley is top ten talent, meaning Portland will need to trade some real value to get a top ten pick. But top ten might not be enough; Milwaukee selects at number six and is in need of a point guard, so maybe Portland needs to trade into the top five. In fact, recent rumors (see link above) have Atlanta asking for Roy or Aldridge from Portland in exchange for the number three pick. This situation points out the power that star athletes have over the teams that own their rights.

This concept is not new to professional sports. Every summer in the NFL top players hold out for better contracts, and sometimes even refuse to play for the team that holds their rights. Of course, similar examples exist in the NBA: Jon Barry refused to play for the Boston Celtics who selected him with the 21st draft pick in 1992. Economists appropriately name these types of situations as "hold ups". The idea is that one party has a specific asset that another party needs to use. The owner of the specific asset is able to "hold up" and extract more economic rent from the user of the asset.

Solutions to the hold up problem include merger or long term contracts. Paul Joskow, an economist at MIT, has studied power plants that are located adjacent to coal mines. The coal mine has an asset (coal) that the power plant needs, and so is able to hold up the power plant. Of course, there are limits to what types of economic rents the coal mine can extract: if it demands too high a price for coal, the power plant could ship in coal from another location or switch over to a different type of combustion (e.g.: it could become a nuclear plant instead of a coal-fired plant). Joskow finds that often coal mines and power plants enter into long term contracts to solve the hold up problem.

Coming back to the Blazers, Oden has a specific asset the Blazers need (his skills as a center). Oden and his agent (Conley Sr.) know this and so are trying to hold up the Blazers to get Conley Jr. to Portland. Now, at some point, Portland will say enough is enough -- they won't pay any price in order to select Conley. Like the power plant in the example above, if Oden and Conley's demands are too high Portland will go with an alternative (e.g.: pick Durant instead or pick Oden and tell him to deal with it). How does this relate to the Celtics? Some fans are hoping that the Celtics, knowing of Oden's desire to be reunited with Conley in Portland, will select Conley at pick number five (if he is still available) and then try to "sell" the rights to Portland for a high price. But it would be naive to think that Portland will "do anything" to get Conley. They may overpay for him a bit, but not by much because there are alternatives. The Celtics would be better served by focusing energy elsewhere, such as deciding which of the remaining players after Oden and Durant would be the best fit for the Celtics in the short and long term.

 

This offseason will be a busy one for Danny Ainge. Not only will he need to pray that the lottery balls fall his way in May, that he ends up with a franchise player out of the June lottery, and that Theo’s contract can be traded for a nice veteran, but Ainge will also have to worry about extending the contracts of some key Celtics players. Jefferson and West could have their contracts extended, but Ainge will probably take a wait and see approach to Allen and Telfair. Gomes will also be in the last year of his rookie contract, and the Celtics risk losing him the following summer if they don’t extend him as well. The question is less about “who to extend” and more about “how much is the player worth”. As much as we like the young players on the team, salary cap realities mean that the owners will not be able to keep all of them around.

Let’s focus on the issue of “how much is the player worth”. One logical approach to putting a value on a player is to compare the player’s performance to other players in the league and then benchmark his salary to those of similar players. One easy way to compare players is to look at statistics. The problem with using this approach is that players anticipate it, and so in their “contract year” (the final year of their old contract) players will attempt to pad their stats so that they look good in comparison to other players. Conventional wisdom holds that players are more productive in contract years and less productive in non-contract years. Is this true? In what follows I seek to test this idea.

I gathered a list of NBA players who signed new contracts during the summer of 2006. This information came from Patricia Bender’s website (http://www.eskimo.com/~pbender/index.html -- I thank fellow Celticsblog member petula for pointing me to the site). These players could either be free agents who signed a new contract (such as Ben Wallace) or players currently under contract who signed an extension (such as LeBron James). From this list I excluded players who had not played in the NBA for the last two years and players who signed minimum contracts (most of the players who signed for minimum contracts were rookies, so they would have been excluded anyway). The sample reduction left me with 48 players. I then compiled points per game (PPG) and rebounds per game (RPG) for each player for the years 2005-2006 and 2006-2007 (as of March 26, 2007). The averages are below (numbers are rounded):

 

Year/Difference	PPG	RPG
2005-2006	11.6	4.9
2006-2007	10.2	4.3
Difference	1.3	0.5
% Difference	11%	10%

 

 

 

 

 

 

Notice that the averages drop in both categories after the contract is signed. The differences are not statistically significant, but for the sake of argument, the numbers imply that, on average, a player plays about 10% “better” in contract years.

This analysis is obviously a very rough first cut. A more detailed analysis would cover many years so as to incorporate any trend in a player’s productivity and to incorporate contracts signed over multiple time periods. One would also want to control for the player’s position, age, total contract amount, and any other number of observable characteristics. One would also be curious about other outcomes such as assists per game, steals per game and blocks per game.

What do these numbers mean for the Celtics? Let me put on my cynical hat for a moment and assume that Jefferson and West are fully aware that they could get extensions this summer and are playing better because this is a potential contract year for them. Jefferson is currently averaging 16 and 11; the analysis above implies that if he extends his contract over the summer he could average 14 and 10 next year. West is currently averaging 12 and 3; next year he could average 10 and 2.5. I do not actually believe this will happen, but the point is that there is some evidence that players improve productivity in contract years, and so we (and more importantly the Celtics management!) want to keep this in mind when thinking about how much to pay players.

Jack and Suzy Welch have a column in Business Week called “The Welch Way”. For those not in the know, Jack Welch was born in Peabody, went to college at UMass Amherst, and ran GE for 20 years. He is widely considered to be one of the most visionary corporate leaders over the last half century. The Welches recently (February 19, 2007 issue) had a column addressing the difficulty managers face between trying to balance short term Wall Street expectations with long term business sustainability. They write:

“Look, anyone can manage for the short term. Just keep squeezing the lemon, wringing out costs until there’s nothing left but the pulp. And anyone can manage for the long term. Just keep telling people: ‘Be patient. Our strategy will pay off in time.’ The mark of a leader is someone who has the rigor, vision, and courage to do both simultaneously.”

I think the Welches don’t emphasize the last point enough: the “do both” path is much riskier, and is littered with managers who thought big but failed.

How does this apply to the Celtics? When Danny Ainge took over as GM (in all respects except title) he was faced with three choices: trade a few pieces to get more veteran help (the Win Now strategy), trade away players and start anew (the Build For Future strategy) or do both and try to Win Now AND Build For Future. As Jack and Suzy Welch point out, it is relatively easy to justify the first two strategies, but risky to attempt the third. Ainge could have justified the Win Now strategy given that the prior season the Celtics had made it to the Eastern Conference Finals. Perhaps the two first round draft picks the Celtics had in 2003 could have been traded with an expiring contract (Eric Williams’) to land an impact vet player, and perhaps the strategy would have paid off (or not… we will never know). Similarly, Ainge could have justified the Build For Future strategy, given that the Celtics were not in good salary cap condition and that the Pierce-Walker duo had just lost four straight to the New Jersey Nets in the playoffs. In addition to trading Walker, Ainge could have traded Pierce, probably netting at least a couple of good draft picks in return. The Celtics could then have rebuilt through the draft; given the absence of Pierce and Walker, the Celtics own draft picks would probably have been very high for a few years, perhaps netting franchise players like Dwight Howard or Chris Paul (or not… we will never know).

In any case, instead of taking either of these courses of action, Ainge decided to take a risk and attempt the Win Now AND Build For Future strategy. By Jack and Suzy Welch’s description, this choice alone marks Ainge as a leader, but the results of this strategy have been dubious. Ainge traded Walker but not Pierce, and ended up with mid-first round draft picks. Ainge drafted smartly for where he held picks, traded fairly shrewdly for players to complement Pierce, and for one brief moment - Game 1 of the 2005 playoffs against Indiana - it looked like the strategy was paying off. But the Celtics lost in seven games to Indiana and have not been the same since. That summer and following year was followed by questionable signings and trades and the results (particularly the 18 game losing streak this year) speak for themselves.

To date, it appears that Ainge gambled on the Win Now AND Build For Future strategy and lost, and is now on his way to join the list of other managers who thought big but failed. Of course, the book is not closed on Ainge yet; there are a few promising young players, Pierce still looks good, and the Celtics should have a good pick in a deep draft. Nevertheless, Ainge’s tenure as GM will forever be blemished, and helps point out why so few managers - in basketball and in the business world - take the riskier path. The managers that do are considered leaders (as pointed out by the Welches) but only if they succeed. Since the path is riskier, it means more of these managers fail than succeed, and those who fail are rarely considered leaders.

{mos_smf_discuss:Celtics Talk}

In recent years, social scientists have started performing more research on sports organizations. For example, the Journal of Sports Economics was started in February 2000 with the intent of publishing academic research on sports by economists. One of my favorite sports economics articles was written by Barry Staw and Ha Hoang titled “Sunk Costs in the NBA: Why Draft Order Affects Playing Time and Survival in Professional Basketball.” The article appeared in the September 1995 edition of Administrative Science Quarterly, a leading social science research journal. I enjoy the article because it investigates a favorite topic of economists â€" sunk costs â€" in the setting of my favorite professional sport: basketball.

“Sunk costs” is a term used by economists to describe costs that have been incurred and are irrecoverable. Once these costs are made, they cannot be “unmade”, and so future decisions should not take into account the size of the initial cost. Economists often complain that companies take actions that result from the sunk cost fallacy: managers often appear to act under the mistaken impression that if a plant cost a lot of money to build, then it should be operated even if it is losing money. In the context of the NBA, former draft picks can be thought of as sunk in the following sense. Certainly future draft picks are valuable, and often function as a form of currency to help trades go through. However, once the pick is used to select a player in the draft, the pick is irrecoverable. There is no way to “do over” the pick once it has been made. Hence, draft picks represent a sunk cost.

Staw and Hoang ask an interesting question. Given that we can think of draft picks as resources that teams spend on acquiring new players, do we see any evidence of sunk cost fallacy? In other words, do we see teams playing high draft pick players more than they should, simply because they are high draft picks? The statistical tests the authors use show that players who were selected earlier in the draft are given more playing time than players who were selected later in the draft, after controlling for a number of factors including player position, on the court productivity, etc. In other words, the authors use statistical methodology to show that if there were two identical players of exactly the same quality, but one was picked early in the draft and one was picked late in the draft, the one picked earlier would get more playing time. This does not make rational sense; clearly the two players should get the same amount of playing time.

The authors’ finding is dependent on the validity of their statistical tests, and it seems that there may be two additional variables that should be controlled for. They used data from the 1980-1986 NBA drafts, so this was before the era of high school players jumping straight to the pros and before the era of salary caps and luxury taxes. However, players could still be selected after one to four years of college, and arguably the amount of time a player spent in college is an important variable. Players that enter the NBA draft after one or two years of college are those considered to be of high potential talent, but sometimes that talent takes years to mature. The Celtics’ own Rajon Rondo might be an example of such a player. On the other hand, players that enter the draft after a full four years of college are those that have already developed into solid players and are ready to contribute right away. The Celtics’ Ryan Gomes is an example of this type of player, as is the Knicks’ David Lee. It is conceivable that managers and coaches may want to play the less experienced players more so as to allow them to develop. This does not seem to be the case with the Celtics’ own Doc Rivers, but nevertheless years in college may be an important variable to add to the statistical tests.

A more subtle but perhaps more important effect that should be controlled for is the effect of a player on the play of his teammates. Statisticians already account for easily measurable things like points, rebounds, blocks, steals and assists, but do not yet account for things like “missed defensive assignment” or “movement off the ball”. These things are hard to quantify, of course, but can have a positive or negative effect on teammates and game outcome. Thankfully, there are now various composite measures that help capture these types of variables. The Roland Rating (found at 82games.com) calculates a score for each player based on how the team does when that player is on the floor versus off the floor. The inclusion of such a variable in Staw and Hoang’s analysis would help account for these difficult to measure effects on team play.

Despite the authors not including the two variables mentioned above, they make a valid point. Namely, past decisions should not influence future decisions. In summary, consider the case of Mark Blount as an example of how this concept relates to the Celtics. Following a productive year Mark Blount was signed to a large contract. Soon after, it became clear that Blount was not a good fit in Boston. If Danny Ainge was more concerned about his ego instead of the health of the Celtics, he might have tried to keep Blount in green, pushing Doc to give him more playing time, and doing his best to show critics that the signing was not a mistake. Instead, Ainge decided to trade Blount to Minnesota (with a package of other players), thereby tacitly acknowledging that he made a mistake, but that the mistake was not going to hinder future decision making.