By Stephen Brosnan
Last week, I discussed the principal-agent problem in college basketball between Duke University’s star forward Zion Williamson and their three-time Olympic gold medal winning Coach Mike Krzyzewski. The principal agent problem arises when two parties have different incentives and the principal cannot ensure the agent acts in their best interest. This led to me thinking about the incentives facing NBA teams vying for Zion’s signature.
The best chance an NBA team has of drafting Zion Williamson is by winning the NBA draft lottery and receiving the number one overall pick. However, in order to do so teams are faced with a perverse incentive. A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers.
The NBA draft is an imperfect system, which rewards the teams with the worst win percentages with a greater opportunity of obtaining a high draft picks. As such, NBA teams are incentivised to ‘tank’ i.e. intentionally lose games in order to increase their chances of receiving the number one pick in the NBA draft. Tanking is associated with multiple problems in relation to the treatment of season ticket holders that have paid to watch the team for the season without full knowledge of the team’s ‘strategy’, distortion to betting markets which can have significant financial implications, detrimental effects on team moral and the creation of a losing culture within the organisation.
Last week, I discussed the principal-agent problem in college basketball between Duke University’s star forward Zion Williamson and their three-time Olympic gold medal winning Coach Mike Krzyzewski. The principal agent problem arises when two parties have different incentives and the principal cannot ensure the agent acts in their best interest. This led to me thinking about the incentives facing NBA teams vying for Zion’s signature.
The best chance an NBA team has of drafting Zion Williamson is by winning the NBA draft lottery and receiving the number one overall pick. However, in order to do so teams are faced with a perverse incentive. A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers.
The NBA draft is an imperfect system, which rewards the teams with the worst win percentages with a greater opportunity of obtaining a high draft picks. As such, NBA teams are incentivised to ‘tank’ i.e. intentionally lose games in order to increase their chances of receiving the number one pick in the NBA draft. Tanking is associated with multiple problems in relation to the treatment of season ticket holders that have paid to watch the team for the season without full knowledge of the team’s ‘strategy’, distortion to betting markets which can have significant financial implications, detrimental effects on team moral and the creation of a losing culture within the organisation.
However, the power of perverse incentives in the NBA is even greater than other sports leagues given that the NBA is considered a star dominated league where an exceptional player has the ability to transform a franchise from no-hopers to championship contenders. Of course, the opposite is also true – when a star player leaves the fortunes of the team often leave with them. Case in point: Lebron James.
- Lebron James was drafted as the number one overall pick in the 2003 NBA draft by his hometown team, the Cleveland Cavaliers. He led Cleveland to their first playoffs in eight years and their first ever NBA finals in 2007.
- In 2010, Lebron left the Cavs and ‘took his talents to South Beach’ by joining the Miami Heat. Following James’ departure, the Cavs had the worst record in the entire NBA over the next four seasons (97–215).
- In 2014, Lebron returned to Cleveland and transformed the team from the worst to one of the best teams in the NBA, leading the team to three straight NBA championship finals and winning the city's first professional sports title in 52 years.
- In 2018, ‘King’ James left once again but this time to Los Angeles Lakers and the Cavs winning record left with him. This season, the Cavs have the third worst record in the entire league (11-41).
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