Navigating Negotiations

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Published: July 1, 2017

The New Orleans Pelicans and Jrue Holiday are engaged in public and private negotiations on Jrue’s next contract. Negotiations are a game, which means they are often improperly analyzed, particularly in a market that is not free and inefficient. Let’s look at this negotiation and negotiations in more generality to see what we can learn, and why I think the Pelicans are going to sign Jrue to a deal averaging about $28.5m per season.

Special thanks to Nick Lewellen (@nicklewellen) for some economics and auction chats. A fine economist.

The Game

It is easy and incorrect to say that Jrue wants to earn the max and the Pelicans want to pay the minimum. That might be true in a vacuum, but this is not a vacuum. Jrue, getting a max or not, has at least some preference for the team he’ll be around, the locale for him and his family, and more. He also has a reputation, a legacy, and a next contract to consider. There’s more, but the point is that it is not just “more money now.” David “The Champion” West’s career the past couple years is an extreme example of this kind of thinking.

Similarly, the franchise would incur certain costs if they signed him to a min contract. Other player may be more reluctant to sign, for instance. Agents represent multiple players, and they can have influence on later deals, as well. Players also exist in their own subculture, and being branded negatively at that level can steer talent away from you. The Kings are likely an example of this, and so where the Pelicans at some point, and they may still be (though if true, it is clearly less a factor than before).

The Pelicans are in a repeated game situation with other player who collude, and the Jrue is in a single play situation with some significant advantages just due to the game structure.

So, each party at the table is negotiating about more than a single contract in the context of a single team. This can not be ignored. I believe a little reflection and fact-checking will show these considerations come into play. Money and minutes are the main things . . . “this contract” and minutes will tie to the “next contract” . . . but there is more on the table, and what matters and how much varies depending on many factors.

The Market

The NBA is not a free market. This means most of what we believe to be “basic economics” has to be giggle-tested in context. Franchises compete for wins, but cooperate for much of their revenue. Economically, they are technically a cartel for the most part. Player skills are highly context dependent, they are not substitutable goods, and they do not have a single-axis of quality. Some players are better than others overall, but fit matters, too. Also, not every team is really aiming at the same goal at the same time. Also, as mentioned above, reputation matters in a repeated game.

Additionally, at the team level, any team that has interest and capital can not just decide to acquire a player. They must have roster room, a signing mechanism, and buy-in from the player to sign the player. If all 30 teams could and would sign a top free agent, each team doesn’t have equal chance to sign that player, so this is not a truly free market dictated, even if you isolate talent and fit and other variables. This means that there are both public values and private values to be considered. This is very important.

Moreover, not only is player talent complex to discuss, it is also complexly distributed. The more common and lower quality the skill set, the more replaceable your talent is. Since there are options for replacement, at that level the market better approximates a free market. We hear a bit about replacement level players, but sometimes those players have some skill that is more rare, and we see those players get more time than others, for instance. Even at the level of min contracts, this holds true; see David “The Champion” West again. Taking those guys out, things are less interesting but easier to analyze.

When it comes to the upper end of the market, the players are the supply, not the teams and their contracts. That is true when there are many players that are substitutes for each other. This means that teams are essentially bidding for a player’s services. The bidding can be modeled based on an auction of sorts. This will allow us to use existing technology to get a hold of the strategies of the parties.

Jrue

Jrue Holiday is an interesting case. To me he is very versatile, but has no skill where he is regarded among the League’s best. He is simply a rare combination of solid skill without glaring weaknesses. He’s was picked outside the lottery and has had some informal and formal League Honors, the latter being an All-Star appearance. His second contract was for 4 seasons, and was for about 2/3 of his maximum salary at the time, signed prior to his All-Star appearance. Since then, his stress reaction in his knee has kept him out of action, plus some personal business for which he took time off. I don’t see how he’s raised his real status, but it’s hard for guys to lose that shine that quickly. Eric Gordon had a high-profile injury history and went from a max contract to about 1/2 of his max. Of course, the NBA landscape changes, and Eric Gordon’s issues were more troublesome to me (and to others) than to Jrue’s. Gordon has some better shooting, but is less than great at many other things. He fit what the Rockets needed quite well, actually, and it earned him Sixth Man honors and not being traded for Chris Paul again.

Taking a reasonable and perhaps charitable view (to some) on the injuries, Jrue is no worse off than he was when we signed him, and has shown himself to be the kind of player the Pelicans need. There are not too many players at his level available at the moment, which works in his favor. So, 2/3 of his max put him at a $20m starting salary, about. Let’s call that his preliminary value. At this point, I expect nothing less that this as the average value of his contract.

Pelicans

The Pelicans are not a team with a long legacy of winning and are neophytes in some key ways. The organization continues to add basketball talent and credentials to the offices, but it’s not clear if that is enough to changes perception in a timeframe that matters to the issues facing the Pelicans. That issue is their strength, which is Anthony Davis and DeMarcus Cousins. Cousins is going into the final year of his deal and would be wise not to extend the current contract. Davis can get out of town as an unrestricted free agent just two seasons later. If this team loses those players, it’s back to the drawing board. Even if they keep Cousins, Davis could leave, but there is no chance if Cousins just walks or has to be dumped. They have to keep the talent and hold it in a League where stars attract stars. Recent movements drive this point home if you haven’t believed me screaming it for the past year (and others for longer).

This puts extreme pressure on the Pelicans to keep the players together. Their best option at this time is Jrue, and Jrue knows it. Jrue gives this team the most ability to have their stars shine. When stars want to make moves, they often get made, since the army of agents and players and executives line up to help for various reasons.

Moreover, the Pelicans have to keep their rep up in the NBA, and taking care of your veterans is a way to do that. When a guy has not obviously regressed, you don’t cut his salary.

There is talk of teams bidding against themselves, but that is not always the case when a player gets a high offer for a team. Sometimes there are errors, absolutely, but there is no substitute for what you want. Also, not all teams’ situations are the same. Player ego can also get involved. There are perfectly rational reasons why a team would pay more than the another team might offer in a bidding war when the person whose services are being bid upon can end the auction for any reason at any time. You don’t always get to make your best pitch; sometimes you just get to make one pitch.

The best play is, then, to make your max offer upfront, then come back with a lower or equal offer later if that does not work. This is based on standard game theory applied to sealed auctions with private values. Players have a public value, but each team has its own private value of each player based on its situation, and those can only be estimated due to imperfect information of those values.

Clearly, each team has no reason to bid above its own maximum value assigned to the player, by definition. If you may only get one shot, then there is risk associated with betting less than the maximum value, and the rarer talent a player is among the next best real options, the higher the stakes are that are tied to that risk. Since the Pelicans have Holiday’s Bird Rights and can not get that much cap room, relatively speaking, that is an advantage for Jrue. A team can bid under their maximum if they understand both the player’s self-evaluation and motives along with the other teams’ private values. Then, they just need to exceed the highest offer from the other teams, adjusted for the non-monetary desires. That puts the risk on that evaluation. So, it is best to just bet your maximum value.

So, betting against yourself is a fine succinct way to describe this, but it is really more of the cost of your initial position. In this case, they are bidding for Holiday’s talent and an advantage for Boogie staying in a year and an additional advantage for Davis staying, casually speaking.

Preliminary Negotiations

The idea that the negotiations start at 12:01 ET Saturday is simply incorrect. He’s been working the Pelicans for a while, and players and agents talk. This has been played out internally and in public. Agents, players, and unofficial dealings are common. Each side knows about deals that are being made and discussed around the NBA. These preliminary negotiations are extremely important and telling.

Pressure can be applied, postures can be adopted prior to getting to the negotiating table. The reason to do this is to change the team’s initial offer.

There is a wrinkle here. Not everything that looks like it creates pressure for the other side to move their price actually creates pressure that moves their price. In fact, if one side is bringing a great deal of apparent pressure, particularly publicly, while the other side is not, it could just be a communication difference, but it could also be a sign that the apparently pressure is not resulting in enough, or any, price movement. That could be that the pressure is just empty gestures or that the preliminary bid is in fact the max. That is one effect of an equilibrium strategy.

The other side of the coin is that the price keeps moving, incentivizing the player to keep applying pressure to keep moving the team’s offer. That will stop at the max, which is why just opening there is the correct move.

Initial Discussions

Initial discussions may in fact never really happen, as the preliminary negotiations may be all there is and the team comes in at the player’s strike price or above. The negotiations in this case are mere formalities.

In the case where they are not, the Pelicans will get their real shot to make their maximum bid. Again, if it’s too low, they risk losing their player and their possible advantage, as they see it, in keeping their stars.

If the sides are close enough, they meet in the middle somewhere, iron out B-list details.

Wider Ranging Talks

If the initial talks break without a real deal, both sides incur risk. The team risks the player leaving since they have, in theory, made their best offer, so the player is simply unattainable in that case. The other possibility is that the player does not believe the team is quite at their max bid. This is another advantage of opening with the maximum bid, as it allows the team to move on quickly. If the player leaves for any reason, another bid above the player’s strike price could lead to a loss for the team. For the player, if they fail to get a sufficient offer, or if they think they are just driving up their value, coming back to a team will could very well result in a lower bid.

While not the same situation entirely, Dell Demps executed this very same move in negotiations with the Kings for DeMarcus Cousins. So, this is not mere academic gum-flapping. This is real life. It doesn’t have to happen, but it happens.

My Take

I believe the Pelicans and Holiday will come to deal. This is not inside information. It’s just what I see based on information I have and analysis. Maybe it is true that Holiday values being elsewhere in a way that even a maximum salary could not overcome. If that’s the case, there would be no meeting. It’s reported there will be a meeting, so I discount this possibility. It is possible, however, that Jrue is not being economically rational and none of this applies. So be it.

It’s also reported that Holiday will, no matter what, not accept the deal immediately. Considering that he likely knows the deal already and that things can change in just a few hours, waiting leads to a greater chance of the deal souring overnight than sweetening. That information had to come from Holiday’s side, so it is intended to increase the offer at the initial talk. This would seem to indicate that the deal is not a maximum salary deal. If it was, then there is no need to apply pressure and he would have already slept on it, so he’d either be agreeing or not taking the meeting.

Since I have seen Dell apparently apply this strategy before, I’ll assume he is sitting firm on a deal.

So, I’m going to make a call. I’m guessing that if it were a 4y deal, it would have a base salary of $25m (meet in the middle) with full raises, which are $2m. That’s 4y/$112m, averaging, $28m.

What’d I really want given that framework is a different reckoning of that deal. Suppose we start at $30m in year 1. He could make just $27.6m in year 2, then $27.2m in the following years. This is the same total, gives Jrue some money upfront, and gives the Pelicans a declining deal.

In a 5y framework, which is reported, that could just be extended to a fifth year at that $27m price, or the whole deal could be rearranged around a 5y original deal, which would change the last 3y to $29.1m. I’d make the last season a player option if a team option were not acceptable to him. In that case, especially in the $27m case if I was going for 5y. He is perhaps less likely to pick up the option at that salary, so that is about all the risk reduction one could hope for.

I do not expect a no-trade clause to be offered. As I do not expect a maximum salary, I see no reason for Jrue to ask for it . . . just as for more money. The team could offer it at a salary reduction, but I don’t think he’d value that. Perhaps with the star-driven NBA, he would want to avoid being swapped for an apparent upgrade, but it just seems unlikely to me.

We’ll see what happens, but I’ve called my shot, which is partway between those cases I laid out . . . $28.5m average salary, give or take. I’ll have a post on the deal, or lack, when appropriate.

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