Termination Risk and Agency Problems: Evidence from the NBA

51 Pages Posted: 18 Jun 2018 Last revised: 7 Jul 2023

See all articles by Alma Cohen

Alma Cohen

Harvard Law School; Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Nadav Levy

Interdisciplinary Center (IDC), Herzliya

Roy Sasson

Tel Aviv University

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

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.

Suggested Citation

Cohen, Alma and Levy, Nadav and Sasson, Roy, Termination Risk and Agency Problems: Evidence from the NBA (June 2018). NBER Working Paper No. w24708, Available at SSRN: https://ssrn.com/abstract=3198010

Alma Cohen (Contact Author)

Harvard Law School ( email )

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United States
(617) 496-4099 (Phone)
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Tel Aviv University - Eitan Berglas School of Economics ( email )

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Israel

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National Bureau of Economic Research (NBER) ( email )

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Nadav Levy

Interdisciplinary Center (IDC), Herzliya ( email )

P.O. Box 167
Herzliya, 4610101
Israel

Roy Sasson

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

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