Schrödinger’s NBA: Free Agent Contracts Under the New Cap

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Published: July 2, 2016

Last night, Solomon Hill agreed to a deal with the New Orleans Pelicans for a reported 4 years and 48 million dollars with 2 million in “unlikely” incentives. The response to this news was mixed. From a pure basketball standpoint, most fans seemed to be pleased with the move. Hill fills a position of need, and if he continues to develop, could be a versatile, defensive-minded player on a team with few players that share that skill set.

The ranges of reactions regarding the size of Hill’s contract were much wider. Some marveled at the idea of a former rotation player earning slightly more than Jrue Holiday next season. Others seemed to think that in a liquid free agency market anything goes. While still others complained about NBA players making that much money at all.

So, how do we understand Solomon Hill, a decent if not good player, making ~12 million dollars a year? Was it a reasonable good contract? Did Dell Demps overpay to just  fill a hole?

Inflation

On July 1st, the NBA experienced a very serious moment of inflation. At midnight, the salary cap for NBA players jumped from $70 million to $94 million, an increase of approximately 34%. At its core, this dramatic increase is inflation, but it is very different from what we see in the real world. Of course, the most obvious difference is the size, but there is a more important difference.

Most of the inflation we experience in our lives occurs over continuous time frames. That is, inflation is always happening whether we know it or not. Ignoring extreme circumstances, you’ve probably never woken up and noticed all the prices of everything around you doubled while you were sleeping. This is why we don’t feel like we experience inflation. It usually grows at a reasonable level over a long period of time. The jumps in prices are never enough to make us look twice, and the jump in prices often have a positive effect on how much we make. The NBA, on the other hand, sees their inflation in discrete time. On June 30th, 2016, the cap was $70 million. The next day it was $94 million. In other words, NBA players, owners, and general managers went to bed one night and woke up the next day in an environment where players’ salaries would increase dramatically.

The NBA’s Sticky Labor Market

Really, the dramatic inflation faced by the NBA shouldn’t be anything impossible to understand. The amount of money split between a certain number of people grew, but the amount of people stayed the same. Well, obviously how much each person makes is going to grow. If only the NBA were that simple. The thing keeping the NBA from simultaneously adjusting as the cap adjust is its sticky labor market.

Economists use the word sticky to describe situations where prices or wages don’t move when the underlying conditions of the economy change. Consider Jrue Holiday, when he signed his contract with Philadelphia in 2013-14 the NBA salary cap was $58.7 million. During the first year of his contract, Jrue’s contract took up just under 16% of his team’s cap space. This year Jrue will make around $11.2 million about $2 million more than he did in the first year of his four year deal, but he will take up less than 12% of the Pelicans overall cap.  If he were to take up as much cap room as he did the first year of his contract, Jrue would make almost $15 million dollars this season.

But Jrue’s salary did not adjust as the salary cap grew. That’s because he signed is contract four years before the increases of the last few seasons, and the NBA’s collective bargaining agreement effectively prohibits players from renegotiating their current contracts while they are still under contract. That’s the sticky-ness. Despite the massive cap inflation, salaries for most of the NBA will not change. The lucky players in the 2016 free agency class will feel the benefits of inflation. They will renegotiate in a more liquid environment and make much more than they would have even a year ago. So the NBA is again a world of haves and have nots. For players the haves are the ones signing contracts this offseason and next, while the nots have to sit it out on the sideline and watch the relative value of their contracts (in relation to their teams cap room) slowly decrease.

Schrödinger’s NBA

Erwin Schrödinger was an interesting guy. Despite his many achievements in physics, the Austrian is best remembered for a thought experiment concerning a cat and her poisoned food. In short, the thought experiment creates a situation where an observer, just by looking inside a box, determines whether a cat is alive or dead. Of course, it’s a bit more complicated than that, but the metaphor was created by Schrödinger as a critique of quantum theory (the book Einstein’s Dice and Schrodinger’s Cat is pretty great discussion of the thought experiment, by the way). In short, Schrödinger wanted to understand how a single object could exist in two states. That is, how can the cat be alive and dead, at the same time, before someone observes it?

The NBA can learn something from Erwin Schrödinger’s cat. Specifically, are the contracts signed yesterday, like Solomon Hill’s, good or bad deals? Well, it depends on how you look at it.

First, if we include the entire NBA, it would seem that we signed Hill to a “bad” deal. Why? Again, consider Jrue Holiday. Objectively, Holiday is currently a superior player to Solomon Hill, but he will make in real numbers about $800 thousand less than Hill next season. So, production for dollar spent, Hill will likely be dramatically overpaid compared to Jrue Holiday. Or, perhaps more fairly, Jrue will be dramatically underpaid compared to current NBA free agents.

On the other hand, remember that Jrue was originally taking up about 16% of the salary cap in the initial year of his contract. Hill will likely take up less than 13% the first year of his contract. So if we move beyond raw numbers, we see that Hill is probably taking up a fair portion of the cap for a player who projects to be a team’s 4th or 5th best player.

Furthermore, when judging the relative quality of Hill’s contract, we shouldn’t always look at the whole set of NBA players, because, again, not every player renegotiated their contract. To understand whether it is a good deal, we should compare it to the deals signed by other 2016 free agents. All in all, Hill seems to have gotten a reasonable, perhaps slightly high, deal for how much he played and his future potential, when compared to other free agents. That slight difference can probably be attributed to the fact that the Pelicans have like Solomon Hill for a long time. They believe he has potential, so they are willing to pay him a bit more now, in the hopes that he is worth a bit more later.

Good or Bad

So did the Pelicans sign Solomon Hill to a good or bad contract? Yes. It is a matter of perspective. Most NBA contracts are living in the old world of cap room. The guys signed last night and over the next few days are living in the new world. Judging the relative value of a contract depends on how you look at it. To be clear, this requires a bit more thought and nuance, but it is the only way to get at the truth and understand what is going on.

Obviously, there is another question. Which perspective is the valid one to use for examining these new contracts? Should we compare free agents to their free agent cohort or to the entire NBA? When comparing the actual quality of deals, you should probably use the former, because you can never start a negotiation by saying, “Let’s write this contract under 2014-15 prices.” Economies move and fluctuate. We have to adjust are thinking and bench-marking with them.

Now, comparing these contracts to the rest of the NBA will become very important when trade season opens up. Remember that “awful” deal Omer Asik signed? The one that was dwarfed by Timofey Mozgov’s new deal? Well, after last night, Asik’s contract doesn’t look so awful. That is true of literally every NBA player that wasn’t a free agent this year. The financial value of their contract relative to the salary cap has necessarily dropped. Meaning, that every NBA player with an old contract has become a bit more of a bargain and thus a much bigger trade chip.  Those “albatross” contracts are now becoming trade chips.

The NBA night is dark and filled with snarky tweets. It can be hard to suss out the truth about a contract’s value on twitter or anywhere else. It takes a level head, and even then you won’t get a clear answer.  The state of NBA contracts is context dependent. So many variables matter, and they all must be considered to reach a conclusion.

So, there is only one viable answer to whether or not Solomon Hill signed a good contract for the Pelicans.

It depends.

4 Comments

  1. mazonmafia

    July 2, 2016 at 4:50 pm

    4 years.  That is the key to why this contract is not an over pay.  In year 1, Hill needs to be the 4th or 5th best option on the team to make the contract reasonable.  Hopefully, he plays up to that mark.  But the important thing to remember, is in years 2, 3, and 4, the salary cap will be so high that Hill will only need to play like a 6th or 7th best option to make the contract reasonable.

    My point is that I’m glad both Moore and Hill are signed for the long term because next year when the cap jumps again, these contracts will look very average.  Same for 2018 and 2019.  It’s all relative.

  2. mvpmb10

    July 3, 2016 at 6:50 am

    That was the key to locking in Asik for so long as well.
    If he just plays fairly decent…His Contract is one of the best…
    My only problem is can Gentry utilize him?
    Those 2 don’t seem to be a fit.
    Monty would be for the Most out of Asik.

  3. mvpmb10

    July 3, 2016 at 6:53 am

    If Gentry has a bounce back year..
    The Pels would definitely be a destination players seek after…
    AD n Buddy
    With all the cap space the Pels will have…
    Another quick rebuild

  4. mvpmb10

    July 3, 2016 at 8:27 am

    Get the*

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