Termination Risk and Agency Problems: Evidence from the NBA

Harvard Law School John M. Olin Center Discussion Paper No. 819

41 Pages Posted: 5 Apr 2015 Last revised: 21 Apr 2015

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Nadav Levy

Interdisciplinary Center (IDC) Herzliya

Roy Sasson

Tel Aviv University

Date Written: April 2015

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 Classification: D20, J44, K00, L83

Suggested Citation

Cohen, Alma and Levy, Nadav and Sasson, Roy, Termination Risk and Agency Problems: Evidence from the NBA (April 2015). Harvard Law School John M. Olin Center Discussion Paper No. 819. Available at SSRN: https://ssrn.com/abstract=2589561 or http://dx.doi.org/10.2139/ssrn.2589561

Alma Cohen (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nadav Levy

Interdisciplinary Center (IDC) Herzliya ( email )

P.O. Box 167
Herzliya, 46150
Israel

Roy Sasson

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

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