Finding Market Inefficiencies

As seen by the Brooklyn Nets trade for James Harden, Houston was able to further capitalize on perhaps the greatest inefficiency in the NBA: superstar contracts. 

Many professional sports have a salary cap that is bargained for between the league and players association. The exception is the MLB, but they have a system where teams pay a penalty if they go over the luxury tax threshold. 

The NBA, unlike other major professional sports, also imposes a ceiling on what any player can make in a given year. There are many justifications for this practice. First, this allows smaller market teams, like Milwaukee, to keep their best player by being able to pay them more money. It also allows other players on a team to get paid more.

As a result, the contracts for NBA superstar players have become very inefficient. There are several players making the “maximum,” and even I could handle those negotiations. If superstar pay was uncapped, however, it would be a different story. Teams would be quick to offer LeBron James substantially more money than he’s currently making. 

So, the Lakers have captured that surplus value. The same had applied with Houston and the contract they signed James Harden to. Then Harden wanted to be traded. How does Houston rectify the situation? They’re certainly aware of the great position they were in, so a trade is unlikely to help.

The trade that occurred will have ripple effects for at least a decade. Houston extracted a combination of four 1st round picks and three 1st round pick swaps from the Nets between now and 2027. 

Trades like this one are unique to the NBA because of the ceiling on superstar pay. You won’t see this in the NFL. Nobody would be crazy enough to trade three first round picks for another player and then pay them market rate on top of that. Not to mention the depth of the NFL draft compared to the NBA draft. 

What’s the point of all this? 

Always be on the lookout for structural market inefficiencies.