Do athletes' individual salaries depend on the performance of their peers? Prototype heuristic in wage bargaining in the NBA

Abstract: This thesis analyzes the link between relative market value of representative subsets of athletes in the National Basketball Association (NBA) and individual wages. NBA athletes are categorized with respect to multiple performance characteristics utilizing the k-means algorithm to cluster observations and a group's market value is calculated by averaging real annual salaries. Employing fixed effects and GMM estimation techniques, I find a statistically significant, positive effect of one-period lagged relative market value of an athlete's representative cluster on individual wages after controlling for past per- formance. This finding is consistent with the theory of prototype heuristic, introduced by Kahneman and Frederick (2002), that NBA teams' judgment about an athlete's fu- ture performance is based on a comparison of the athlete to the average properties of the representative group of similar individuals in that they offer a comparable role on the basketball court.