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Risk and NFL contracts

In contrast to most leagues, NFL contracts are not guaranteed. By rule, if a player suffers a career ending injury, the team's obligation to make future payments terminates in the current year.

This might be viewed as heartless and unfair, a charge made by Joseph Nocera in the New York Times. I once agreed with Mr. Nocera, but I now believe this charge is inaccurate, and incomplete at best.

Why? Well, first consider what teams and players would agree to in a competitive labor market. Absent limitations on pay, player wages would equal (or perhaps exceed) their expected marginal revenue products. Some players might get injured and continue to receive their paychecks. These players would, on average, receive more than they produced, whereas those who were not injured would receive less. Wages in total would equal the marginal contribution of players to NFL revenues.

That contracts do not guarantee future salaries does not imply that injury risk is fully shifted to the player. Given the tendency of teams to terminate contracts, the risk-sharing solution is to front-load the contract with a signing bonus. If players are risk averse and teams are not, the injury risk can be priced into such a contract whose total value is lower than the expected marginal revenue product of the player. This can be mutually beneficial to both player and team.

My sense is that signing bonuses are a much greater proportion of a contract's total value in the NFL than in the NBA or MLB. Given the differential behavior in guarantees between leagues, high bonuses (e.g. Peyton Manning's $34.5m bonus, and injured center Matt Birk's $6m bonus, both discussed in the Times' article) in the NFL are a predictable consequence of the policy.

Where NFL policy hits players is in the draft, where competition in the labor market is deliberately curtailed. Those players who never make it to free agency, and whose careers are cut short by injury, bear the costs of the NFL's heartlessness.