Date of Award

2018

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Qi Ge

Abstract

The NBA is widely known as the least competitively balanced professional sports league in North America. Past literature has shown that as competitive balance declines, so does fan interest and revenues for both individual teams and the league as a whole. In 2003, the NBA implemented a luxury tax,a penalty mechanism that taxes teams who spend above the salary cap, in order to improve competitive balance. Using luxury tax and league level production data from the 1998 to 2016 NBA seasons, and a model that estimates competitive balance, this paper investigates whether the implementation of the luxury tax in 2003 positively affected competitive balance in the NBA. The results indicate that competitive balance significantly improved from 2003 to 2012 compared to the seasons prior to the implementation of the luxury tax. Additionally, I find that the more teams pay in luxury tax, the worse competitive balance becomes, suggesting that as teams stockpile more talent, the league becomes competitively imbalanced as a result.

Included in

Economics Commons

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