22 August 2011

The Economics of Drafting

PBA 2010 Rookies
On 28 August 2011, the Philippine Basketball Association (PBA) will be holding its 2011 PBA at a new venue known as Robinsons Place Manila. This early, several prospective superstars and franchise players in the world of amateur basketball have applied for the Draft, such as Marcio Lassiter, Chris Lutz, Eric Salamat and Jason Ballesteros.

This annual activity has been going on for several years now, but how valuable is it really for teams who have picks in the first round and for teams, such as Meralco Bolts, who prefer to deal their picks for players in the free agency pool?

There is actually an economics involve in the PBA draft. Let us try to examine them.

The opportunity: The draft picks awarded to a PBA franchises is one of only two ways for a team to organically build a roster without giving up valuable resources. The other is convincing an aging player to sign for a modest amount or some other type of more-than-market-rate salary. Both of these options allow teams to sign players at a great fiscal discount relative to their contributions and don’t require a sacrifice of existing personnel.

The reward: The specific benefit of a draft pick is that the rookie pay scale in the PBA ensures that a top draft pick will only command about 30 percent the salary of a legitimate superstar. It is also realistically about 50 percent or less of what lottery picks could command if they had the option to hit the free agency market instead of the draft itself. That’s a lot of bang-for-your-buck considering that rookies can often be as big a draw at the box office as veterans. Drafting a player also puts the franchise in a better position (relative to suitors) to re-sign him because it allows the player to acquire “Bird rights” before they become an unrestricted free agent.

The risk: Despite the discount relative to a superstar contract, the reality is that each first rounder will still cost you at least a hundred thousand pesos a month. That’s a lot of money to wager on the success of an unproven asset. None of these players has demonstrated they can compete at the professional level. If the player ends up being a total bust (not uncommon) and useless at the pro level, the team is still on the hook for the millions year-after-year as their draft selection sits on the sideline, or wastes away in the new PBA Development League.

Compare this to the in-season alternative of about PhP 50,000 per month for an unpicked rookie straight from the free-agency market. It is not unusual, but a team will have less chances of landing an unsigned superstar employing this method. The good news is that they also only risking about 10 percent of the cash outlay to run substantially the same experiment. Though General Managers (GM) mainly have money at risk with the exception of Air21, they also face the risk that a player does not show up for their PBA career as planned. The Alaska Aces probably wouldn’t have drafted Alex Araneta with their first pick in 1991 had they known that he will be more effective as their sales manager than as a primary center for six years.

The opportunity cost: With each selection made in the PBA draft, there are two separate opportunity costs to consider if you are the team’s GM. The primary opportunity cost is all the players still remaining in the draft. Many team’s future has been ruined for making the wrong draft day selection. The second opportunity cost to consider is the trade value of the draft pick. Draft day deals are a very common occurrence simply because of the fact that many GMs would prefer to take a tested proven role player over an unproven raw talent who could become a superstar down the road.

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