Labor Market Bargaining: Theory and Evidence From NBA Free Agency

Abstract

The economist's understanding of job market negotiation is constrained by the limitations of prior models and the scarcity of testable data. Standard job search models demonstrate how firms and workers meet, but not how they negotiate; historical bargaining frameworks show how agents bargain in isolation, but not in a market setting. Empirics in the field have been historically difficult to measure: negotiation information and outcomes are rarely public and the lack of a defined bargaining timeline or set of counterparties makes charting the labor market nearly impossible. In this paper, we use a first-of-its-kind dataset from the labor markets of professional sports to address both prior limitations. First, we provide a theoretical labor market bargaining model to make testable predictions about job market negotiations. We test the model using data from the free agency market of the National Basketball Association (henceforth, ``NBA"). The multitude of uniquely publicly available data surrounding the NBA allows us to chart the bargaining positions for both negotiation counterparties at any point in time. Using this dataset, we can quantify not only the surplus over which the two sides are bargaining at every point in the negotiation period, but also the number and approximate quality of the outside offers each side has on the table. We demonstrate that, on both sides of the market, an agent's final bargaining outcomes are improving in the quality of his outside option. We further show that teams who can demonstrate credible constraints on their ability to pay---in this case, by spending more money to sign another player---secure better bargaining outcomes. Finally, we establish both theoretically and empirically that the larger the difference in the outside options of the two sides (i.e. the more money over which they are negotiating), the quicker they eventually converge to an equilibrium agreement. Our results are robust to alternate specifications of our bargaining outcome and bargaining leverage instruments.