What is the purpose of the NBA’s strange maximum salary rule?

There are aspects of professional sports and the organization of professional sports that we sometimes accept without critical analysis.  But then, when we do finally analyze them critically, we find that they make little or no sense at all.

One of those organizational aspects I am thinking of is the NBA’s maximum salary limit. As Dave Berri points out in his post on Freakonomics, the NBA is the only sports league with such a strange anti-competitive bidding rule.  

What purpose does such a limit serve?  It certainly doesn’t foster competitive parity.  Each team already has a maximum limit on total player salary.  If a team wants to spend 98% of its salary on a given player, why not let it do so?  (If anything, such a rule indirectly serves to destroy competition… see below)

As Professor Berri suggests in his post, the maximum salary rule is nothing more than an unfair (in this writer’s estimation) redistribution of wealth from the superstars who deserve down to the lesser players who do not.  By artificially limiting the amount of compensation a team can pay to any one player, the rule artificially limits the amount of salary the great players can receive without regard to the value they are delivering in exchange for their salary.  As a result, and as Berri’s research has shown, the top level players routinely outproduce the value of their contracts.  In other words, they get screwed. 

And since only superstar players are affected by the rule, the net result of the rule is to shift the artifically created surplus salary dollars that should have gone to the superstars down to the middle class veterans.  The middle class screwing the rich… what a concept!!  Dan Gadzuric thanks you.

Another unintended consequence of this misbegotten rule is the hated “Dream Team” phenomenon which appears on the verge of becoming a growth industry (see the Lakers).  If the Heat and others were forced to pay market rates (within the salary cap structure) to LeBron and Wade, they could not afford both.  However, since neither can accept amounts above the maximum salary, neither loses any additional revenue if he accepts his salary from the same employer.

The final unintended consequence is one I pointed out a while back.  The maximum salary tends to encourage teams to overprice upper middle class talent (see the Bucks and Michael Redd).  The maximum salary serves as a marking point of a team’s desire to keep a given free agent.  When combined with the dual effects of public pressure and the artificially limited supply of free agents whose contracts come up each summer, the artificial marking point produced by the maximum salary leads teams to make stupid offers.  (“Well, our fans will go nuts if we lose Redd… if offer him the maximum no one can blame us for not trying to resign him”).

In almost every aspect, the maximum salary rule is a peculiar and unproductive feature of the increasingly bizzare, irrational documents that the NBA and the NBPA refer to together as “Collective Bargaining Agreements”.

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One Response to “What is the purpose of the NBA’s strange maximum salary rule?”

  1. jbrett Says:

    Ty,
    Can I ask what is meant by the reference to the Lakers, and making the ‘Dream Team’ phenomenon a growth industry? Something new, or just their hoarding of max- or near-max stars?

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