Slide 1
Utility Players & Utility Functions:How compensating
differentials affect rent appropriation in the NBABenjamin
Campbell, Ohio State UniversityDavid Kryscynski, Brigham Young
UniversityRuss Coff, Wisconsin School of Business
#Utility Players and Utility Functions11Firm-Specific Human
Capital and Competitive AdvantageUnique capabilities drive
heterogeneous performance these, in turn, draw on Firm-Specific
human capital (FSHC) and knowledge.Shared rents (bilateral monopoly
w/firm & worker)Specificity: Skills are more valuable in one
firmGap between opportunity cost and use value at that firmFirm may
capture rent beyond the opportunity costInvestment problem in FSHC.
Employee reluctance to incur direct & opportunity costsHoldup
hazard: Gains must justify the investment#Utility Players and
Utility FunctionsHometown Heroes: FS human assets in the
NBAFirm-Specific value created: Hometown status increases player
popularity & revenue: For Carmelo Anthonys 1st game w/his
hometown NY Knicks StubHub ticket prices tripled.Gap between
opportunity cost (other teams) & use valueFSHC? Is it a skill?
Its firm-specific & embedded in people Bi-lateral monopoly:
Rent is shared.H1a: Stars earn more on moving to their home
stateH1b: Stars earn less on moving from their home stateH1c: Stars
earn more when staying in their home state#Utility Players and
Utility Functions
Compensating Wage Differentials
#Utility Players and Utility FunctionsCompensating Wage
Differentials and FSHC Investment BenefitsCompensating wage
differentials:Undesirable work commands a wage premiumPreferred
work may be linked to lower wagesFSHC can have positive utilityA
firms mission, culture, or the work itself may be valuedObtaining
FSHC can be enjoyable (social networks, etc.)This is part of the
value employees can appropriateAppropriation by the firm. More
financial value arising from FSHC flows to the firm (or other
stakeholders in the firm).
#Utility Players and Utility FunctionsI'll be able to afford
what I want. But not too many things excite me, except winning and
being around my family-Derrick Rose (Bulls), December 2011"That's
like the ultimate dream at the end of the day. Who wouldn't want to
go back home to play?" -Carmelo Anthony (Knicks), January 2011
Derrick Rose to the Occasion & Got a 5 yr Contract w/the
Bulls#Utility Players and Utility FunctionsHometown Heroes and FS
UtilityFirm-Specific utility created: Heroes enjoy status and
visibilityLive near friends and familyOther firms cannot provide
this source of utility Compensating differentials: Substitution
between wages & utility.H2a: Players take lower wages to move
to their home stateH2b: Players require a wage premium to move from
their home stateH2c: Players take lower wages to stay in their home
state#Utility Players and Utility FunctionsEveryone Loves a
WinnerPositive utility. Players prefer to play on a winning team.
But, utility and skills are not firm-specific.Derrick Rose
(earlier)Lebron James move to Miami taking a $15M pay
cut.Compensating differentials. Does positive utility allow owners
to appropriate more financial returns?H3a: Players accept wage
discounts to move to a playoff bound team.H3b: Players require a
premium to move to a team thats not playoff bound.H3c: Players
accept wage discounts to stay at a playoff bound team.
#Utility Players and Utility FunctionsTraining Camp: A Few
MeasuresSample: 626 NBA players 2000-2009 (2234 player-yrs)DV: Rent
= salary (e.g., opportunity cost)Independent variables:Homeward
move: ToHome=arriving hero, FromHome=leaving hero. Playoff move:
ToPlayoff=better team, FromPlayoff= worse team.Stay in a good
situation: StayHome, StayPlayoffStar (starts over of the games)
(n=367)Controls:Lagged salary Person/team fixed effectsMobility
(baseline effect) Age, Age2Offensive/defensive rating YearMinutes
played Position#Utility Players and Utility FunctionsShow Me the
Money When Movingaa Fixed effects panel regression. Significant
controls : Year/team dummies, team value, lagged salary, minutes
played, rating, age.
VariablePredictedFindingMoveMove*StarToHome*StarH1a:
FromHome*StarH1b: StayHome*StarH1c: ToHomeH2a: FromHomeH2b:
StayHomeH2c: ToPlayoffH3a: FromPlayoffH3b: StayPlayoffH3c: #Utility
Players and Utility FunctionsRobustness: Any fouls?Fixed/random
effects. Stronger findings for random effects. Pay reduction for
moving away from a playoff team (might be involuntary) Cutoffs to
define stars. Games started, Minutes played, Efficiency rating.
Winning results are more robust. Wage . Similar results for annual
salary change.Do moves alter performance? Not generally. Moving to
a playoff team increases performance but average pay is lower for
such moves.#Utility Players and Utility FunctionsAlley-Oop at the
BuzzerGood moves for less money. Lower pay for moves that increase
utility (home & winners).Staying power. Stars appropriate
hometown value over time. Winners share the rent over time.Strategy
for the next game: A theory of rent must incorporate utilityHow do
firms manage utility/pay tradeoffs?When do workers realize both
financial & non-financial returns? (scarcity? temporal
specificity? Fairness?)#Utility Players and Utility FunctionsMarket
Frictions and General Human Capital
#Utility Players and Utility FunctionsHazards on the Road to a
Resource-Based AdvantageManagement DilemmasOpportunism/moral
hazardTurnoverKnowledge mgtRent AppropriationBargaining powerSocial
capitalInsider tradingStrategic Factor MarketsAdverse
selection/LemonsOpportunism/bidding warsUncertain
complementaritiesAmbiguous Property RightsInformation
AsymmetriesXSustained Firm PerformanceKnowledge-Based
AssetsFirm-specificityCausal ambiguitySocial complexity#Utility
Players and Utility Functions14Firm-Specific Human Capital and
Competitive AdvantageUnique capabilities drive heterogeneous
performance these, in turn, draw on Firm-Specific human capital
(FSHC) and knowledge.Shared rents (bilateral monopoly w/firm &
worker)Specificity: Skills are more valuable in one firmGap between
opportunity cost and use value at that firmFirm may capture rent
beyond the opportunity costInvestment problem in FSHC. Employee
reluctance to incur direct & opportunity costsHoldup hazard:
Gains must justify the investment#Utility Players and Utility
FunctionsRethinking Competitive Advantage from Human
Capital*Misleading theory? FSHC doesnt affect factor markets as
predicted.Investments in FSHC signal a rare ability/willingness to
acquire new FSHC at another employer.Coarse signals: Education
obscures FSHC (Berg, 03); Previous employers success halo
(Apple/Google).Heterogeneous value of GHC: Complementary assets
compensate for devalued FSHC.What now? Nature of HC-based
advantages?As investment cost drops, individuals require less to
justify investment (ROI) firm captures more.*Campbell, Coff &
Kryscynski (AMR, 2012)#Utility Players and Utility FunctionsLowest
threatRivals must compensate for lost utility & value of
FSHCHighest threatRivals offer greater utility & devalued FSHC
is a non-issueLow threatRivals must compensate for the value of
lost utilityHigh threatRivals added utility compensates for
devalued FSHCEmployee Rent Appropriation and Specificity of Assets
& UtilityFS Human AssetsHigh LowHappier @ firmHappier @
rivalsFS Utility#Utility Players and Utility Functions