Kevin Murphy is a John Bates Clark Medal winner, he has a MacArthur “Genius” Award and is a superstar in the economics profession.  But the green-eyed monster has finally stirred because I found out he is consulting for the basketball players in the current labor negotiations.

Teams pay a luxury tax if they go over a salary cap specified by the league.  The revenue generated by the tax is transferred to the other teams. If the luxury tax is too high, teams will not go over the salary cap and the labor market for payers will be moribund.  But if it is low, the rich teams will go over the salary cap and the poorer teams will get the revenue this generates and will themselves compete to hire players. The labor market for players will be active.  There is some threshold luxury tax below which the market is active and above which it is inactive.  The players want a tax that is below the threshold.  Who might be able to work out this threshold?  Kevin Murphy:

[An ESPN reporter] asked a union official how they know where that player-friendly effect stops, and where the de facto hard cap kicks in.

His answer was that their economist Kevin Murphy had the task of predicting how owners would spend under the last CBA, back when it was new. Looking back, they realize his work was, the official says, “pretty much perfect.”

Who is the consultant to the teams I wonder?

(HT: MR)

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