||Over the last decade, the number of underclassmen selected in the first round of the
NBA Draft has dramatically increased. Even when controlling for performance in college,
underclassmen are paid significantly more than college seniors. What is going on here?
Isn’t experience a good thing? Groothuis, Hill, and Perri (2007) were the first to
the rookie pay scale introduced in 1995 is responsible for the shift in behavior.
Lazear’s (1998) option value theory as a means of explaining this action. His theory
result of applying the financial principle of option value to labor economics. As
of a worker’s future production becomes more volatile, his option value increases.
NBA Draft, early entrants have more option value than college seniors because less
information is available about them, and they are less developed. The rookie pay scale
compensation limits that lower the relative price of rookies. With less money at risk
same upside potential, teams have an incentive to choose early entrants. This study
empirically proves that option value is significant in determining draft order after
that along with the new rookie compensation structure, it explains the unraveling
in the NBA