European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Do individual salaries depend on the performance of the peers? Prototype heuristic and wage bargaining in the NBA

Harald Oberhofer () and Marian Schwinner ()
Additional contact information
Harald Oberhofer: Department of Economics, Vienna University of Economics and Business; Austrian Institute of Economic Research (WIFO)
Marian Schwinner: Stockholm School of Economics

Abstract: This paper analyzes the link between relative market value of representative subsets of athletes in the National Basketball Association (NBA) and individual wages. NBA athletes are categorized with respect to multiple performance characteristics utilizing the k-means algorithm to cluster observations and a group's market value is calculated by averaging real annual salaries. Employing GMM estimation techniques to a dynamic wage equation, we find a statistically significant and positive effect of one-period lagged relative market value of an athlete's representative cluster on individual wages after controlling for past individual performance. This finding is consistent with the theory of prototype heuristic, introduced by Kahneman and Frederick (2002), that NBA teams' judgment about an athlete's future performance is based on a comparison of the player to a prototype group consisting of other but comparable athletes.

Keywords: Prototype heuristic, wage bargaining, NBA, Behavioral economics of organization

JEL-codes: D82; J31; J44 May 2017

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