This is a hard one. On one hand, things cost what they cost. Miami wanted shaq so they had to pay him more than he was worth for the life of the contract. But he was enough to win a championship. Chicago did the same with Wallace, though I don't know if that will lead to a championship, but it will make them better.

Then on the other hand, theres the Jerome James contracts. A big man only needs one good year. Jim McIlvain had a good year in PRACTICE. He hardly played, but word got out and he got a big contract with Seattle. The Nene contract might be an example of this. Tim Thomas is definitely an example of this, which is why the Bulls didn't want him. So never give a big man with one good year a big contract.

I think it would pay off to look at what kinds of players are bargians. I think it's guys in the 3rd, 4th, 5th years in the leauge. OR guys that developed kind of slowly or were on the bench behind a star. These are the guys that you trade for (the Clippers used to give these guys away) with a few years left in their contracts and then if they pan out, you sign them to that big contract because they will be worth it. They won't be 30 yet and (if their not a lazy big man) they wil have learned the game and improved their skills and bodies to their optimum level. Then once THAT contract is up, trade them to some sucker team for those 3,4,5 year players. Unless they are a Jordan or a Barkley or a LaBron.

Matt,

Your understanding of economic concepts is generally pretty good, but you get this one pretty wrong. Why would you assume that there will ALWAYS be some auction bidders that after too little, some the right amount, and some too much, no matter what the circumstances?

If this theory were true, wouldn't it mandate that EVERY free agent was over paid? Could that really be the case? Did Phoenix really overpay for Tim Thomas when they gave hime $400,000 for their playoff run? What about Raja Bell? Most people thought Phoenix "bid" way too much for his services at just below the mid-level exception. After his performance in the playoffs this year, Phoenix seems to have gotten an amazing BARGAIN on Bell. And that's just a few examples from one NBA team.

The right amount to bid in an auction for a player is the maximum amount that you would have paid for a player if you could play the player based on the actual performance they give you. In a theoretical world of perfect information, everyone would bid that right amount. Obviously, you know we don't live in that world, but we also don't live in the world you imagine.

In order for there to always be bidders that are too high, too low, and the right amount, you would have to have a number of bidders that would sufficiently minimize the chance that everyone bidding would underbid or bid the right amount (i.e., nobody would overbid). Obviously, an infinite number of bidders with imperfect information would get you there, but conceivably, a far lesser number would give you a sufficient percentage of probability that the three possible bid positions (too high, too low, just right) would be filled by at least one bidder.

Unfortunately for your theory, that number isn't as low as the 30 NBA teams (or even the larger number of minor league or international teams, which aren't really proper to consider given that they are not realistically in the same market). Moreover, you don't actually even have all 30 teams bidding competitively for every free agent (even high profile ones) because they can't afford to or because that player doesn't fit with the team.

So, given that there aren't that many teams actually bidding for a given player, there should be a fairly high probability (all else being equal) that many teams would underbid or bid just right and nobody would overbid for a player.

So, the fact that so many high profile free agents turn out to be busts, is somewhat surprising if you don't consider any other factors (especially when you consider that teams should be more likely to invest in good information gathering with high profile players because the risk/reward ratio is higher). Your theory that the players are overpaid because consumers of any product generally overpay is wrong as regards to the NBA (it is also wrong in general economic theory, but we won't go into that as this post is too long already)

The real story as to why so here are so many high profile free agents are busts probably involves a combination of some of the following factors (althought this anaysis is off the cuff and the list is most likely incomplete):

1. Bidding prices must incorporate substantial Risk that tends to raise bidding prices.

even teams with the best information can't predict how a player will perform next year, much less 5 years down the line. So, the bidding price for signing a high profile player to a long term deal (4-5 years at least) incorporates lots of risk. The fact that the player might be a bust should decrease the price of bids somewhat. However, there are contervailing forces. NBA owners are rich, so the potential loss of money doesn't make a whole lot of difference, especially since most teams manage to put some butts in seats even when they aren't winning. Many teams trying to sign high profile free agents are either bad (so the harm of a the player being a bust doesn't seem as severe) or desperate to for the missing piece for a championship team (and afraid that the championship window may pass them by). For these teams, the risk of a bust is less of a factor.

On the other hand, the upside risk is huge for these teams. If they are right, not only do they (1) get a great player that will help them win games (and potentially championships), but they will also (2) have denied a competitor that great player as well. Return to the example of Tim Thomas, who the Bulls could have easily prevented from playing for another playoff team (especially considering they were paying him over $13 mil. No team wants to be in the situation of the Bulls, which basically gave Phoenix the player they needed to make a deep playoff run. Granted, Phoenix was in the opposite conference, so it didn't end up mattering, but imagine if they were in the same conference and Phoenix had ended up beating the Bulls based on the performance of Thomas.

Basically, these teams place low value on the risks and high value on the rewards. When the bid is based on future performance, these teams are highly likely to overbid for high profile free agents.

2. Bad/Mediocre Teams are Bad/Mediocre decision-makers and are more likely to bid for high profile free agents, which makes them more likely to bid too much (and too little) than to bid the correct amount.

Remember, most of the teams bidding for high-profile free agents are either bad or trying to find the missing piece for a run at a championship. Thus, these teams will tend to be teams that probably haven't been very good at evaluating talent in the draft and/or pre-season camps. If these teams generally aren't good at evaluating the prospects of young talent, why would they be any better at evaluating older talent? It should be noted that the team doesn't necessarily have to be BAD to be bad at evaluating talent in certain situations. Look at the Spurs with Rasho Nesterovic. the approximately $42 mil over six years they signed him for in 2003 was ridiculous. But, they hadn't had to really do a proper evaluation of centers in years because of David Robinson. Or maybe the current/recent past San Antonio front office is just not good at picking out good centers. Evaluating players at different positions involves different skills and considerations.

In any event, teams with enough money to go after high profile free agents are generally BAD (or at least not very good) at evaluating talent either at that position or at every position. If you are bad at evaluating talent, then you will undervalue some players and overvalue some players (but you are unlikely to correctly value anybody).

The chances of all potential bidders underbidding a player are probably low given random distributions (we don't know enough to know if they are not random). Thus, there will usually be one or two teams that are bidding too high. The high high salaries for free agents with questionable upside is merely the result of one or more teams overvaluing the same player.

3. High profile free agents are more likely to be busts.

High profile free agents are generally going to be players that their former teams don't think are good enough to warrant the high salaries. Some of them are coming off a successful playoff team/performance that maked them look better than they actually are. Some of them are coming from bad or mediocre teams, where their talent looked better by comparison. If they were really so good, why won't the team they were on (and who is in the best position to evaluate their talent) pay them more? Realistically, for bidding high for a high profile free agent to be a good move, their former team had to make a mistake. A team that has seen that player play every day for years are less likely to make a mistake evaluating that player than a team with less information about that player.

4. High profile free agents are a hot, limited comodity.

There aren't very many and they can be gone fast. Under such circumstances, teams are more likely too pay more and take a chance on the player than trying to spend time evaluating whether some low profile player or a player from a semi-pro league would be a better choice. Thus, prices are going to be higher than they would be if there was more choice of free agents and more time to evaluate them.

All of these factors probably combine in some manner to ensure that teams will generally overpay for high profile free agents. When you overpay for a player, they are much more likely to be a bust, even if it would have been a good move to sign them for much less money.

I'm not convinced by your critique of Matt's view of the economics. I think you're unduly ignoring features of a sealed-bid auction that cause it to differ from a double auction. In a sealed-bid auction, each bidder needs to consider not only what they think the player is worth, but what other bidders may be willing to bid. You only have to be the top bidder by the smallest possible increment, so there will be an incentive overbid, and some bidders will do so. If we assume heterogenous preferences or budget constraints (which only seems reasonable) then there need be only a very few bidders to make it highly likely that at least one will overbid.

Teams have no incentive to bid above their determined value for the player. This value should be independent of the what other team's bid. Not doing so results in a net loss. In fact in a sealed bid first price auction all the players are incentivized to shade their bids lower than their value of the player. Winning is doesn't matter if it costs more to win than what you get from winning. Thus, the winner's curse.

I don't agree with Matt's suggestion that you shouldn't purchase stuff in an auction. Just don't get all caught up and bid higher than you what you thought the thing is worth before the auction starts.