NFL players with contracts that include roster bonuses force teams to pay early and make any later threats to cut a player costly.
In most industries, contract renegotiations are shrouded in secrecy, making data about timing and tactics hard to come by. But Chicago Booth’s Gregor Matvos is extracting lessons from a more transparent data source for contract renegotiations: the US National Football League.
Strictly regulated, the NFL contracting process is governed by a collective-bargaining agreement that, in its effort to ensure fairness, brings a normally opaque contracting environment into the open. That allowed Matvos to study 4,220 NFL contracts signed between the 1994 and 2002 seasons, and find that timing played a large role in contract outcomes.
NFL contracts are nonguaranteed, which means that they bind a player to a team, but that team can drop the player at any time. Consequently, veteran players negotiate to get paid in full before the season starts, so that if they do get cut, they already have the cash in hand.
Delaying tactics are good for team owners on a budget. If a team’s managers begin renegotiations at the beginning of the off-season, right after the season-ending Super Bowl game held each winter, they can threaten to fire a player if they want to bargain down his price. But, since it is early, rosters on other teams are not full—making it possible for the player to get a better deal elsewhere. On the other hand, if managers wait until late in the off-season, that same player is going to have a much harder time finding a new job.
To balance the power, players have begun to negotiate contracts that include roster bonuses that teams are forced to pay early, and make any later threats to cut a player costly.
Matvos discovers, among other things, that teams regularly paid approximately $260,000 less for a contract with a roster bonus than they would have for a nearly identical contract in which all payments are paid as salary. But the tradeoff is worth it to NFL players, who want to be picked up early.
The research suggests that timing is an essential part of contract renegotiation—for this industry, at least.
Gregor Matvos, “Renegotiation Design: Evidence from NFL Roster Bonuses,” Journal of Law and Economics, May 2014. Chart reprinted with permission from the University of Chicago Press. Copyright 2014.
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