The Market for Talent: Are Top Draft Picks Overpaid?

The National Basketball Association imposes two important, and unusual, restrictions on
its new employees: a draft, in which they are assigned a single employer with which they
can contract with, and a pay-scale, which prescribes maximum compensation levels for
up to the first four years of their careers. Using a sample of veteran players, who have
gone through free-agency, I establish the value owners ascribe to a player-season in the
open free-agent market. Comparing this value to player compensation, under rookie
contracts, allows me to examine the surplus generated by new players for their teams. I
find that the two rookie restrictions allow owners to extract significant monopsony rents
from new players; the rents are highest for top draft choices, and decline steeply as the
draft goes on, implying that owners are rational surplus-maximizers.