Mixing the princes and the paupers: Pay and performance in the National Basketball Association

a r t i c l e i n f o We investigate how team and individual performances of players in the National Basketball Association respond to variations in intra-team pay inequality. By breaking down team dispersion into conditional and expected components, we find that expected pay dispersion has a positive effect on team and individual performance. We find that team and individual performances are essentially orthogonal to conditional pay inequality, counter to the hypotheses of fairness and cohesion proposed in the literature both for sports and general occupations. A change in collective bargaining regime in 1996 had little impact on either team or player productivity. This paper will analyze the relationship between pay disparity and individual player performance in a particular team sports setting, the National Basketball Association (NBA). NBA franchises have the choice of setting pay levels for players with low or high degrees of pay inequality. A policy of pay inequity within teams involves hiring a small number of superstars ('princes') alongside a larger number of less able players ('paupers'). Alternatively, teams can hire a roster of players who are perceived to be similarly gifted, and hence adopt a more equitable pay structure. Our focus will be on individual response of player productivity to changes in pay structure within teams. As we shall show below, it appears that teams have diverged in their pay setting policies with some franchises offering fairly equal pay structures and others offering unequal pay scales with a mix of princes and paupers. The relationship between pay inequality and worker performance has attracted much attention amongst labor economists and industrial relations specialists. This is largely because the theoretical literature is sharply divided as to the likely impacts of increased pay inequality on worker performance. The seminal theoretical contributions of Lazear and Rosen (1981) and Rosen (1986) established tournament theory in which a salary scale that is convex in hierarchical job grades could promote optimal effort of workers in response to perceived increase in relative rewards through promotion. A hierarchical pay system can deliver incentives to provide effort that a uniform, egalitarian system cannot. Moreover, a hierarchical pay structure with increased wage dispersion over another, otherwise similar, pay structure can induce incentives for greater effort and higher future performance, since the returns to higher performance are increased (Milgrom and Roberts, 1992). Hicks stated the contrarian argument that " it is necessary that there should …