Ratcheting Up: Adjusting the Incentives in the NBA Draft

Abstract

In this paper, we develop a modified salary scale for NBA rookies that adjusts player financial incentives to enter the draft early. Our proposed “ratcheting” salary schedule pays different salary amounts depending on draft pick and the number of years the player delayed entry to the draft to alter the financial incentives of declaring early. We analyze this proposed new salary scale using a put option analogy to determine early exercise boundary positions in which there is no value in the option to delay entry into the draft. The results show that under a ratchet salary system the incentives for early entry to the draft can be greatly altered, especially for freshmen and sophomores unless they are expected to be lottery picks. This information may help players make better decisions of when to enter the draft and can address unraveling in the NBA labor market.