REPUTATION IN BARGAINING: NATIONAL FOOTBALL LEAGUE CONTRACT NEGOTIATIONS

Michael Conlin (*) I. INTRODUCTION The notion of reputation has been used to explain everything from limit pricing to the chain store paradox to cooperation in the finitely repeated prisoners' dilemma game. Robert Wilson (1985) states that "reputation can explain many behaviors--perhaps too many. It is too easy to suppose that there is an unobserved state variable called reputation that explains all that happens. The better approach is to develop a well-specified model in which the effects of reputation are delineated" (27). Wilson also discusses the difficulty of empirically testing the effects of reputation. This difficulty has led researchers such as Camerer and Weigelt (1988) to perform controlled experiments designed to test these effects. This article develops a wellspecified bargaining model in which reputation effects are analyzed. A unique data set of National Football League (NFL) player contracts allows me to empirically test the predictions of my model. Many bargaining games do not occur in isolation. Rather, individuals often negotiate in several bargaining games sequentially. For example, a union representative often negotiates a sequence of contracts for different locals and a lawyer who represents a number of different clients in sequence may negotiate out-of-court settlements. Professional sports teams and professional athletes illustrate another example of sequential bargaining. Sports teams negotiate with a number of players sequentially in an effort to reach contractual agreements. This article addresses the issue of reputation effects in a sequence of bargaining games. Reputation effects refer to an individual's actions in a bargaining game providing some information about the individual, which influences his actions and his opponents' beliefs about those actions in subsequent bargaining games. In this manner, the outcome of a bargaining game has predictive powers on the outcome of subsequent bargaining games. This article presents a model in which a buyer faces a sequence of two bargaining games with different sellers. The model addresses how reputation effects influence sequential bargaining games by having the buyer's valuation be positively correlated across bargaining games. Each bargaining game is structured as a "war of attrition" game where both the buyer and seller can either make a conceding offer, continue negotiating, or terminate negotiations at any time. There are costs per unit time incurred by the buyer and seller during negotiations, and their surpluses are discounted after a certain time. A unique sequential equilibrium outcome is calculated from which well-defined comparative static results are obtained. The model is applied to NFL contract negotiations, where the team is the buyer who negotiates with different players sequentially. The surpluses of the buyer and seller are discounted after the start of training camp based on the commonly held belief that a player's expected performance is adversely affected by missing the start of training camp. Conlin (1999) finds empirical support for this belief. (1) The comparative static results are empirically tested using rookie contract data of players selected in the 1986 through 1991 NFL drafts. These empirical results suggest that an NFL team's contract negotiations are affected by the terms agreed to in prior contract negotiations (with different players) and when these terms were agreed upon. The article is organized in the following manner. Section II presents a brief literature review on reputation and bargaining and discusses this study's contribution. Section III describes a model of two bargaining games where a single buyer negotiates with different sellers sequentially. Section IV discusses the NFL draft, the contract negotiation process for those players drafted, and NFL rookie contracts. Section V relates the model to NFL rookie contract negotiations. Section VI summarizes the NFL contract data, and section VII describes empirical tests of the model's comparative static results. …