Networks in Contract Negotiation
The current off-season in the NBA has seen a plethora of gigantic contracts given to players previously undeserving of contracts of these size. Many of these have been facilitated by the signing of a $24 billion TV deal signed by the NBA, increasing the league’s profits and thereby the salary cap in the future (in a nutshell, the salary cap is how much a team can spend on players, exceeding it causes the team to pay large fees to account for it). When using the concepts of bargaining and auctioning to analyze the situation, we see the logic behind these increasingly large contracts.
In a sense, contract negotiation is a mixture of both auctioning and bargaining. Teams interested in a free agent both hold values for the player, essentially bidding against each other to sign the player. There are some cases where teams know what the other team’s value is, and some where both are not aware of other teams’ values. The teams partake in a first-price auction for the player, with the “winner” of the auction being the team that offers the highest price. In this case, the increased salary cap for teams allows them to place higher values on players, as they have more money to spare. Thus, the auction prices end up higher all across the board, leading to larger contracts.
Though the auction is roughly accurate, the distinction is that in the end, the player has the ability to choose which contract he wants; he has agency in this situation. We can see the bargaining aspect of these contract negotiations, as the player is able to bargain with other teams in this process. When speaking with one team, a player is able to leverage his outside options to add on to the “surplus” he is receiving from the team he is currently negotiating with. This closely resembles the concepts of Nash’s bargaining solution, as an individual is given a certain amount based on the total from both his outside options and his current option. So, players are able to further increase the money in their contracts by threatening to sign with another team that has already offered a large contract, leading to even larger contracts due to the increased salary cap.
When combining the concepts of bargaining and auctioning in the context of contract negotiations in the NBA, we see how contract totals have skyrocketed as of late, leading to an even more lucrative league.