Capology and Championships

By Mike Dorf

As a long-suffering Knicks fan, I have been watching the free agent bidding these last few days with anticipation and dread.  My first thought upon learning that the Knicks had come to terms with Amar'e Stoudemire was "he must have a latent injury that will prevent him from ever playing effectively again."  But then I started thinking about the economics of free agency and had a few observations.

1) Top players who say they want to win a championship are not entirely sincere.  They want to win a championship so long as that's consistent with close-to-maximizing their income.  Lebron James, Dwyane Wade, Chris Bosh et al could have decided that they would all evenly split a couple of max salaries among themselves to create a kind of all-star team for the Knicks, Bulls, Nets, or any other team with a lot of cap room.  Occasionally a player will do something like this--but usually it's a player who has played for many years with a particular team who wants to finish his career there, or one nearing the end of his career and hoping to finally win a championship by taking a pay cut to go to a contender, but one almost never sees this from a superstar at the top of his game, nor does one see players who do make such financial sacrifices doing so on the order of 50% of their salaries.

2) I don't say this by way of criticism.  I'm much more interested in the social norm among super-elite athletes.  Partly, I think, that the ability to command a max salary (in the NBA, where they are capped) or to be the highest paid player at one's position (in other sports) is an important part of how athletic greatness is measured in our time.

3) I would note that in other fields one sees substantial compensating differentials.  Law professors are willing to do the work we do rather than earning substantially more as partners in major law firms because: a) we are still paid more than enough to live comfortably; b) presumably we find the work more interesting; c) we generally have better hours; and d) we have persuaded ourselves that ours is a more prestigious job (although, as with many things, I'm sure this depends on what audience one cares about).  (Lawyer readers should insert here e) we couldn't find the inside of a courtroom with a seeing eye dog.)  One sees even starker differences within the legal profession if one compares across other sectors, including public interest and government work.  Here the compensating differentials include the psychic rewards of doing good rather than simply doing a client's bidding.

4) But I wonder whether there is something like the max free agent effect within sectors that have large compensating differentials relative to other sectors.  That is, we see people accepting very much less money to do much the same work as someone else in another sector--e.g., a combat medic places his life on the line for substantially less money than a civilian medical worker does a safer version of the same job because of  patriotism--but we don't often see such financial sacrifices for one version of the job rather than another.  E.g., Lois Lawyer may be willing to work as a public defender for $40,000/year rather than working in the same city for a law firm for ten times that much, BUT if there are two public defender offices in the same town, and one pays $X while the other pays $2X, we are very unlikely to see a lawyer who has a choice go to the job that pays only $X, even if the lower-paying job presents the opportunity to work with somewhat better skilled colleagues.  That is, the lure of practicing as a public defender on an "all-star team" seems unlikely to induce substantial financial sacrifices.

5) All of the above is based on my anecdotal observations and any or all of these could be wrong, although I think I have the big picture right.  If I do, then it seems that the decisions people make about whether and when to make financial sacrifices for compensating differentials are chunked by job description but not so much by "firms" within sub-field (putting aside factors such as geographical inflexibility because of family and related matters).