The economics of the NBA trading deadline (from my email)

From an anonymous correspondent:

Perhaps, as NBA fan, there’s a column to be written about the incentives that drove the NBA trade market: namely the all-out search to avoid/get out of the luxury tax and the looming “tank” battle among the 6 worst teams. These are both direct results of the recent NBA collective bargaining agreement changes. Of course, as these attempts to regulate behavior go, the ‘benign’ intentions of the regulators are far different from the actions of the rational actors having to live within the system.

The funniest behavior-following-incentive example was orchestrated by the Minnesota Timberwolves. In step-by-step:

–They traded Mike Conley Jr. + a 1^st round pick to the Bulls for “cash”.

–Why would they do this? For two reasons: one above board, one below board.

–Above board: the trade freed up cap room to trade for another Bulls guard, in a separate trade (Ayo Dosunmo). They could not have done that trade, according to cap rules, with Conley on board.

Now the below board, cap and rule circumvention steps:

–The Bulls then re-traded Conley to the Hornets as a ‘throw-in’ portion of a larger trade.

–The Hornets then waived Conley

–Why these moves? Because now Minnesota can re-sign Conley after he was waived. They would not have been allowed to re-sign him if the Bulls cut him. (You can’t re-sign a player you traded…unless that player is re-traded).

There will, of course, be no evidence that Minnesota set this whole process up during the step 1 portion. But, human intuition would say: of course this was all part of Minnesota’s original plan.

And then economically: I challenge any business, anywhere, to have executed a better cost-savings strategy than the Boston Celtics did this year. They left last off-season with a looming $540mm salary + luxury tax bill for this 2025-26 season. Through a series of trades, they have cut that down to $190mm – and have fully avoided the luxury tax. Most amazingly: they are a better team today than they were at end of last year. That is $350mm in savings in one year, with a quality improvement to boot! Unheard of efficiency.

Sadly: the worst part of the NBA overregulation world will now commence. 6-8 teams will spend the rest of the year trying to lose every game. Losing profits in this world, through the ‘logic’ of the NBA draft lottery.

At any rate, a fun day for any NBA fan – but especially for the economically-minded. Incentives matter!