Luck in High-Stakes Firm Lottery Allocation an Exogenous, Real-World Test of Coasean Efficiency and Invariance

The Coase Theorem’s empirical credence and overall relevance to real-world settings continue to be questioned. Identification of a high-stakes, salient (to both Coasean claims) setting that features exogenously-assigned property rights has proven elusive according to the literature. While several studies examine the Coasean implications of professional sports league player draft rights, we present evidence that draft rights are endogenously assigned. Therefore, an omitted variable such as managerial (in)efficiency can obscure evaluation of the Coase Theorem. In a league featuring managerial turnover, team fixed effects do not solve the issue. Therefore, we cultivate, verify, specify, and examine an exogenously-assigned draft right—draft lottery luck—for the 2000-2015 NBA Drafts. Given evidence of profit-maximizing teams and the currency of the league-stated purpose of a (probabilistically) reverse-order player draft (i.e., not to assign Jimmie Joe to Cleveland but to achieve competitive balance or rights assignment over expected wins), we frame Coasean invariance in terms of team profits and Coasean efficiency in terms of downstream team expected wins. We find robust evidence for “instantaneous” Coasean efficiency (as in efficiency of the efficient market hypothesis) under the empirical setting’s timing: there is no evidence that exogenous lottery luck assignment ever influences downstream team wins (at any lag). However, there is statistical evidence that lottery luck increases downstream profits via increased downstream revenues. We conclude that Coasean invariance fails in this setting. Statistical evidence suggests lottery luck assignment does not influence talent resource allocation but does generate team income effects. That is, the Weak Coase Theorem holds but not the Strong Coase Theorem in this salient, high-stakes, real-world setting of exogenous rights assignment. Results of a secondary analysis are consistent with Coasean efficiency arising by lucky teams substituting away from veteran talent and failure of Coasean invariance arising from a fan-derived revenue/endowment effect on draft rights