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Would Cleveland Be Better Off With LeBron James or a New DaimlerChrysler Plant?—A Commentary by Ian Ayres ’86

The following commentary was posted on newyorktimes.com on June 28, 2010.

Would Cleveland Be Better Off With LeBron James or a New DaimlerChrysler Plant?
By Ian Ayres ’86

In my last post, I wrote about LeBron James’s conflicting objectives of pursuing money and championships. This conflict is particularly acute because the NBA salary cap prohibits many strong teams from offering James anything close to his market value.

But while NBA teams are constrained, nothing stops other actors from offering LeBron money to sign with a particular team. Ford dealers in the greater New York area could offer LeBron millions if he agreed to promote their dealerships and to sign with the Knicks or Nets. Fans of the Dallas Mavericks could put money in escrow that would only be paid if he agreed to play in Dallas.

Of course, there would be a huge incentive for individual fans to free ride on the efforts of others. Even if I would gain $100 in utility if LeBron signed with the Celtics, I would prefer for others to foot the bill instead of me.

But local and state governments are natural agents to overcome this kind of free-riding problem. The city of Cleveland or the state of Ohio could offer James a variety of financial incentives to re-sign with the Cavs. Cities routinely give financial incentives to teams — for example, subsidizing the cost of arenas — to keep the teams from leaving. The public subsidies are defended on a mixture of economic and hedonic grounds. Professional sports teams can generate tourism and job growth. And citizens might just be happier living in a place where they can have a local team to route for.

But these same arguments might also apply to a transcendent talent like James. In narrow economic terms, Cleveland and the state of Ohio might be hundreds of millions of dollars better off if LeBron stays put. Moreover, many local fans will be heartbroken if he leaves. Elected officials in Ohio understand both these points. That’s why even Ohio Governor Ted Strickland was willing to join in a musical plea (“We are LeBron” to the tune of “We Are the World”).

But if Ohio is willing to give business incentives, financial incentives, and tax incentives to encourage companies to move to Ohio, why not consider kicking in financially to try to keep one of the state’s prize assets. Turn LeBron into his very own “enterprise zone.”

In 2004, Ohio invested $535 million to expand a DaimlerChrysler Jeep facility in Toledo. But seriously, don’t you think the average voter would prefer to invest in LBJ?

Rent-seeking competition from other cities could push public LeBron bribes to astronomic levels. In 1993, one academic estimated that Alabama paid a whopping $200,000 per job created to lure Mercedes to its fair state. Inter-city competition might easily devolve into an inefficient “beggar thy neighbor” equilibrium.

The NBA might also want to nip this kind of signing side-payment in the bud. But at the moment, the league can’t block a city or state player tax incentive. (Memo to the league: during labor negotiations, you might push for a provision prohibiting players from entering into any contract that is conditioned upon a player signing for a particular team. Memo to union: resist this proposal.) Generally, the league should worry that inter-city competition would favor the larger cities where a superstar can be adulated by more fans. (This is a literal example of Sherwin Rosen’s classic “The Economics of Superstars.”) Tax incentives would tend to work against league parity.

But given endowment effects, Cavalier fans may have more to lose than bigger cities have to gain from winning this King-sized prize. If we add in a bit of Wizard of Oz loyalty — there’s no place like home — to James’s objective function, this tax-incentive arms race is a competition that the city of Cleveland just might win.