Saturday, January 19, 2013

Protecting NBA Players from Themselves

Matt Yglesias floats an idea to help keep NBA players from blowing all their money:
Establish something like a flat $500,000 per year salary for every player. Then any financial compensation a player receives over $500,000 has to come in the form of an annuity—a fixed annual payout every year for the rest of your life. A player who's more in-demand will get offered a larger annuity than a player whose services are less-demanded.
I wonder to what extent it would help.  The problem with the idea is that NBA players would be able to borrow against their annuity.  If players did indeed do that and basically spent the same amount, the annuity would just add unnecessary transaction costs .  To work, it has to rely on some taboo against borrowing.  That could be true, but certainly many athletes that end up broke have no problem with taking on lots of debt.

My advice to NBA players would be to blow your money on a big house or several houses or apartments and pay in cash.  The key here is to trick yourself into thinking investment is consumption.  At least when all the money is gone, you'll have an asset left over.  It's not a well-diversified portfolio of stocks and bonds, but it's something.  Besides, stocks and bonds aren't baller, but sweet cribs are.  If their is an element of peer pressure to spending a lot, this should satisfy some of the signalling requirements.

Of course, if they end up spending all their money, selling the house and then spending all their money again, all is lost, but maybe there are a few more road blocks and wake up calls along the way.  Plus, if Allen Iverson had a baller apartment in NYC, a sweet mansion in Philly, and beach house outside of LA.  He'd at least have some assets for the $200 million he ran through.  Plus, this is a guy that refused to pack and would just buy new clothes in every city he went (and leave them in a hotel).  At least, this way he'd have stocked closets in three cities.

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