A Deterrence Analysis of New Federal Penalties for Unscrupulous Sports Agents



This probably won't be on the agenda for Thursday's debate between President George W. Bush and Senator John Kerry, but sports agents will now violate federal law (in addition to NCAA rules and, if applicable, state laws) should they lure student-athletes into unknowingly signing contracts that forfeit their remaining collegiate eligibility. The law, which was co-sponsored by U.S. Rep. Bart Gordon (D-TN) and U.S. Rep (and former Nebraska football coach) Tom Osborne (R-NE) and signed by President Bush last Friday, holds that violators could be fined up to $11,000 for each offense. Specifically, agents are now 1) forbidden from providing inaccurate information or items of value to an athlete or his family before signing a contract; and 2) required to provide written notice to the player that he can forfeit his NCAA eligibility if he signs a professional contract.

I find the amount of $11,000 to be an interesting and likely appropriate sanction, especially if we consider the notion of deterrence. Here's why: This law appears primarily designed to avoid instances of where agents persuade unprepared college athletes (i.e., those not likely to be drafted or to be drafted late) into renouncing their remaining collegiate eligibility. Now, for a moment, consider that most agents receive about a 4% commission for representing an athlete in signing a contract.



In light of these two ideas, let's consider this hypothetical:



At the end of the 2004-05 college basketball season, Craig Smith, a junior and starting power forward for the Boston College Eagles, contemplates declaring for the 2005 NBA Draft. However, before making his decision, he receives feedback from Marty Blake, the NBA's Director of Scouting, that while he is a good pro prospect, he most likely would not be drafted or perhaps be a late 2nd round pick and is thus better off staying at BC for his senior year and then entering the 2006 NBA Draft. Smith, though, also receives feedback from several agents interested in signing him, and they tell him that Blake is being much too conservative with his projections, and that NBA teams have told them that Smith is a definite early 2nd round pick with a pretty good chance of cracking the end of the 1st round--and thus 1st round guaranteed millions. Plus, with a talented agent representing him, Smith's chances of being a 1st round pick escalate considerably, or so he is told.



Quantitatively then, consider the disparate odds presented to Smith:



According to Marty Blake, Smith has a . . .

0% chance of being selected in the 1st round

20% chance of being selected in the 2nd round

80% of not being drafted

But according to prospective agents, Smith has a . . .

55% chance of being selected in the 1st round

40% chance of being selected in the 2nd round

05% chance of not being drafted

So how would Smith decide? Well, if he were to give equal weight to both Blake and the prospective agents, then he would internalize his odds as follows:

28% chance of being selected in the 1st round

30% chance of being selected in the 2nd round

42% chance of not being drafted

But do you really think that Smith would give equal weight to Blake and prospective agents, particularly if multiple agents are pursuing him and only repeating what the others have said? In fact, it would seem that agents competing with one another for Smith's services would have an incentive to present the most optimistic projection, so that a snow-ball effect of sorts occurs, with each subsequent agent presenting a rosier and rosier picture. So, even assuming that others close to Smith (e.g, his head coach, Al Skinner) agree with Blake, it appears that the more often he is told by prospective agents that he should declare, the more likely he would feel confident in his draft prospects.



In short, then, I don't think Smith would give equal weight to what Blake and prospective agents are telling him, so the odds might be better distributed if we assumed Smith gives 2x as much weight to the agents than what he gives to Blake:

37% chance of being selected in the 1st round

33% chance of being selected in the 2nd round

30% chance of not being selected

Granted, this analysis is completely based on my assumptions. And no, I don't know Craig Smith personally. For all I know, he might rather go to medical school after college than the NBA. But assuming he is like most NBA prospects, I don't think this scenario is too far-fetched. And assuming it's about right, I suspect Craig Smith would declare for the 2005 NBA Draft because 1) he perceives the most likely outcome to be him being drafted and 2) if drafted, he is most likely to be a first round pick.



Or so he thinks.



So what does this have to do with the $11,000 amount? Well, agents typically receive a 4% commission for representing players in contract negotiations. So what would be the commission for an agent who represents a 2nd round pick in the NBA Draft? Well, almost all 2nd round picks sign non-guaranteed contracts for the minimum, which this year is $385,000. And 4% of $385,00 is $15,400--or just a few grand more than would be the new penalty for knowingly providing an amateur athlete with false information. On the margins, then, this law should discourage opportunistic agents from misrepresenting a player's chances of becoming a 1st round pick: If the agent misrepresents to an amateur player that he is a sure 1st round pick, and then that player falls to the 2nd round, that player would only sign a contract that provides the agent with a slightly greater commission than the amount of fine that could be imposed (at least theoretically) on the agent. And if that player isn't drafted, then the agent could really lose out.



The bottom-line is that an amateur basketball player who has remaining eligibility should probably stay in school unless he is certain of being a 1st round pick, in which case I would likely advise him to go pro (since he would be signing a guaranteed, multi-million dollar contract and thus transferring risk of future injury or poor performance from himself onto a pro team), and I explain that concept in my law review article Illegal Defense: The Irrational Economics of Banning High School Players from the NBA Draft.



And this law, if utilized, should make that premise more likely.

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