NBA Contracts and Recency Bias: An Investigation into Irrationality in Performance Pay Markets

This paper examines the impact of lagged performance on free agent contracts for players in the National Basketball Association. The main approach of the paper is twofold. The first piece investigates how past performance affects future performance in the two seasons after contract year and compares it to the impact previous performance has on contract terms for free agent players. The second piece investigates the rationality of free agent contracts in their entirety by comparing the impact of lagged performance on total accumulated production and total dollar value paid. The goal is to determine if performance prior to contract year is underweighted in contract decision-making relative to its predictive power of future performance. There is evidence that performance in years prior to contract year is overlooked in contract determination decisions by NBA general managers, and there is mild evidence that performance data two years prior to contract year are underweighted given their predictive power of future performance.