Fifteenth International Conference on Sport & Society

Abstract

Salary caps, which act as price ceilings for teams on the cost of players, are commonplace in various North American professional sports leagues. The National Basketball Association (NBA) utilizes a framework known as a “soft” salary cap, whereby the cap can be exceeded by paying a financial penalty (i.e., the “luxury tax”). Therefore, not only can teams optimize their players’ salary allocation within the cap, but they can also strategically decide to exceed the salary cap, if the marginal benefits exceed the cost of the luxury tax. Thus, the purpose of the current study is to investigate whether strategically exceeding the salary cap in the NBA can justify the cost of the luxury tax in terms of efficiency. Salary cap data were collected from Spotrac, an online sports database containing information on team payrolls and player contract information from 2011 to the present. Data from the 2011-12 to 2022-23 NBA seasons were gathered for analysis. Using each team’s estimated luxury tax bill, we categorize teams into either those that violate the cap (violators) or those that do not (non-violators) based on each season. Team performance data were gathered from Basketball-Reference, a publicly available sports database. The efficiency of on-court performance and playoff status (playoff vs. non-playoff team) is studied using two-stage data envelopment analysis (DEA) following the approach of Yang et al. (2014). This previous study also evaluated the wage efficiency of NBA teams, and accounted for whether teams violated the salary cap.