The Effect of Competition on the Demand for Skilled Labor : Matching with Externalities in the NBA

This paper studies a novel explanation for observed productivity differences among firms in the same industry. Competition is allowed to affect labor productivity, so that heterogeneity in competition affects the demand for skilled labor, leading to differences in firm performance. This mechanism is explored in the setting of professional basketball where heterogeneity in competition is easily measured. I develop and estimate a matching model with externalities, where the value of a match between a player and team depends on the entire allocation of matches. The results show that competition has a significant effect on hiring decisions, and leads to a clustering of talent among firms that are particularly strong rivals