Content area
Full Text
Abstract
The assumption that workers are paid their marginal product underlies the theory of competitive labor markets and is the basis for comparison with non-competitive markets. Many firms, however, generate revenue in fixed lump-sums that are unrelated to the efforts of current workers. For example, many professional sports receive substantial income from broadcast rights, which are negotiated at wide intervals. We develop a theory of compensation in the presence of "fixed revenue" and test our theory using data from the National Basketball Association. Our results indicate that TV revenue tends to equalize players' salaries. Players' performance and popularity tend to enhance players' bargaining positions. Popularity with fans particularly helps players with greater bargaining power.
Keywords: fixed revenue, marginal revenue product, National Basketball Association
(ProQuest: ... denotes formulae omitted.)
Introduction
Standard neoclassical economics predicts that labor markets operate efficiently when workers are paid their marginal revenue product (MRP). Firms that set wages above the MRP fail to maximize profit, and, in competitive product markets, are eventually forced to exit. Conversely, firms that offer less than the MRP cannot attract employees.
Standard theory, however, depends on a direct relationship between worker effort, output, and revenue. The difficulty in measuring the relationship between effort and output led Lazear and Rosen (1981) to propose that firms sometimes design rank order tournaments to elicit efficient levels of effort when MRP is costly to determine or indeterminate. This paper takes on a related problem with standard theory: That firm revenues often depend on fixed payments that are unrelated to workers' current effort. Colleges, for example, collect tuition payments at the beginning of a semester, before many students have even selected their classes. The major North American sports (baseball, basketball, football, and hockey) all depend heavily on revenue from network TV contracts that were signed long before many current players were in the league. We refer to these payments as "fixed revenues."
In this paper, we use data from professional basketball to show that worker compensation in the presence of fixed revenue takes place on two levels. A portion of the player's compensation reflects the impact of his efforts on variable revenue (his MRP). The rest of his compensation results from his bargaining with the team. To a degree, the presence...