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I.
Introduction
By analyzing negotiation strategy between National Basketball Association (NBA) players and owners during the 2011 NBA lockout, economic implications of the 2011 collective bargaining agreement (CBA) and why the owners achieved major concessions, this paper contributes to the literature on the competitive balance of sports leagues. The paper finds that the 2011 CBA results in a more favorable position for owners.
The 2011 NBA lockout, which began on July 1, 2011 and ended on November 26, 2011, led to a ten-year CBA, with a mutual opt-out clause in 2017. The lockout is the owners' counterpart to a strike. It is designed to force the players' union to accept the demands of owners. Because the success of the NBA depends on competitive balance, team owners argue that the 2011 CBA puts the league in a more cost-effective position (Rishe, 2011). The reason is the league's competitive balance relies on a new system of luxury taxes that deter large-market teams from outspending their small-market counterparts. In particular, in the new CBA, the more a team exceeds the annual salary cap, the more punitive the tax penalty. For example, the 2013-2014 Miami Heat exceeded the salary cap for three straight seasons. As a result, the team paid a tax rate of $2.50 for every dollar spent above the cap (Thomsen, 2013). In an outcome that will impact the league over the life of the CBA, the 2011 agreement institutes a provision of revenue sharing more favorable to owners (Beck, 2011a).
The 2011 NBA lockout and CBA demonstrate three points. First, the presence of asymmetric information via owner revenue shifting and financial non-disclosure may cause the essential conflict between owners and players (growth of player salaries) to result in a lockout. Exacerbating this asymmetric information problem, many team owners shift revenue from the basketball franchise into related business ventures. As a result, owners may misrepresent the financial condition of teams. Television contracts, concessionaire agreements and other NBA-related enterprises provide such opportunities. Such actions may induce players to accept a lockout as a means to induce owner financial disclosure (through arbitration or owner behavior). The bargaining game in this paper shows the occurrence of a lockout to be a rational response to a scenario of asymmetric information. Second,...