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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