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December 21, 2010
Moral Hazard
The Dangers of Catering to a Star Free Agent

by Kevin Pelton

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When LeBron James and Chris Bosh joined Dwyane Wade in signing with the Miami Heat over the summer, they irreparably altered the landscape of the NBA. The full extent of that impact is only beginning to be felt. It was suggested soon after that we'd now entered the Super-Team Era, where stars looked to join up to create a handful of stacked championship competitors. However, that might have oversimplified the issue. Instead, the bigger change to NBA philosophy could be the rising importance of keeping a superstar from leaving via free agency.

For some time, it was taken for granted that the only way to get an elite player was through the draft or a well-timed trade. Rarely did the league's best players change teams via free agency--until, of course, the very best of them did. In an NBA economy where every team can make the same offer thanks to sign-and-trade deals, a player's current team no longer enjoys the same advantage once afforded by Bird Rights--an unintended consequence of the league's restriction on maximum salaries.

It is worth noting that the necessity of catering to a superstar player with free agency on the horizon is nothing new. After all, that's exactly what the Cleveland Cavaliers were apparently doing with James for several seasons. For a variety of reasons, that strategy did not work, yet the takeaway from other teams was that they needed to redouble their efforts to win now to please their stars.

The most obvious example of this strategy came over the summer, when the New Orleans Hornets remade their roster after rookie GM Dell Demps and coach Monty Williams convinced Chris Paul not to request a trade. The Hornets quickly dealt second-year point guard Darren Collison as part of a four-team trade that landed forward Trevor Ariza in New Orleans. In the short term, there is little question the deal made the Hornets better, since Ariza filled an important need and Collison's minutes were limited by the fact that he backed up Paul. Still, in terms of total value, New Orleans sold low on the promising Collison.

The potential for Paul to force his way out made sense, given that the Hornets were coming off a lottery campaign and had an uncertain financial future even before they were purchased by the league. It was much more surprising to hear Saturday's pair of Orlando Magic trades tied to the possibility that center Dwight Howard can opt out of his contract and become a free agent at the conclusion of the 2011-12 season, a notion explained most clearly by CBSSports.com's Ken Berger. After all, Orlando has accomplished plenty over the last two seasons, and the Magic's early-season struggles could easily be written off if not for the specter of the Heat looming over everything.

Orlando's trades are similar to the ones made by the Cavaliers over the three seasons leading up to James' departure in that they upgraded the team's talent base while sacrificing financial flexibility. Bradford Doolittle broke down in his Transaction Analysis how much Orlando increased its obligations for the 2013-14 season with this deal. If Howard does jump ship, the Magic will no longer have the ability to quickly get under the salary cap and rebuild, making his potential departure all the more painful. That's the risk Orlando is taking.

At the same time, Howard himself is taking relatively little chance. If things work, he benefits and sticks around. If not, he can sign with another team and leave the Magic to deal with the rubble--a scenario that certainly sounds a lot like a post-James Cleveland, which ranked 29th in the most recent edition of ESPN Insider's Future Power Rankings. That makes this a textbook example of what economists call "moral hazard"--a situation in which one party (the superstar, in this case) is insulated from the risk involved with long-term decisions and therefore adopts a more uncertain strategy.

Usually, when moral hazard has been invoked in sports, it has been to describe the behavior of executives (as by Baseball Prospectus alum Keith Law for ESPN Insider). The most obvious moral hazard issue in sports might be the disconnect between coaches, who want to play veterans to win now because of the insecurity of their jobs, and general managers who prefer to develop their young draft picks. The superstar issue is slightly different because, of course, Howard and Paul were not actually working the phones and completing these trades. Still, their positions have forced the hands of their general managers.

The question then becomes whether it is worth it for teams to essentially turn their long-term planning over to players who are only committed for the next couple of seasons. I'm pretty sure Cavaliers fans would quickly say no. Perhaps James always had one foot out the door and there was nothing Cleveland could have done to keep him. Even in that scenario, however, loading up for the remaining years with James was the best strategy under a "Flags Fly Forever" philosophy. While the Cavaliers' last two seasons are remembered now for their disappointing endings, they did produce 127 wins.

If there is any benefit to selling superstars with short-term moves, that probably justifies them despite their high long-term cost. Elite players are so crucial to championship-level success in the NBA, and so hard to find, that once a team has a superstar it makes sense to do just about anything possible to hang on to them. As a result, unless the next Collective Bargaining Agreement includes a franchise tag that allows teams to restrict the leverage stars have via free agency, expect more short-term trades in the future to try to keep franchise players happy.

Kevin Pelton is an author of Basketball Prospectus. You can contact Kevin by clicking here or click here to see Kevin's other articles.

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