Transcript Training Camp

Screening and
Signaling
Edition 7: Chapter 12, pages 450-454
Edition 6: Chapter 12, pages 450-456
Screening and Signaling
 Definitions:
Screening- An attempt by an uninformed
party to sort individuals according to their
characteristics.
Signaling- An attempt by an informed
party to send an observable indicator of
his or her hidden characteristics to an
uniformed party.
Examples of Screening
1.
2.
3.
4.
Screening to enable price
discrimination (coupons, rebates,
outlet malls,…)
Screening to sort different types of
workers.
Choice of deductibles associated
with different types of insurance.
Obtaining a physical to obtain a
favorable life insurance policy.
Examples of Signaling
1.
2.
3.
Obtaining an advanced degree
such as an MBA or PhD.
Seller offering a warranty.
Labor contract negotiations/
Negotiating a compensation
package.
Example 1: Signaling with a Warranty

Suppose there are sellers of lemons
and sellers of peaches and buyers
cannot tell a lemon from a peach (like
the adverse selection example we did).
Suppose a seller can obtain a price of
$2,000 if he has a lemon and the buyer
knows it’s a lemon and a price of $3,000
if he has a peach and the buyer knows
it’s a peach. Finally, assume all sellers
can credibly offer a warranty.
Example 1: Signaling with a Warranty

Let the probability of a lemon breaking
down be .70 and the probability of a
peach breaking down be .10. Suppose
the warranty states that if the car breaks
down, the seller will pay the buyer
$1,500 to repair the car.
Example 1: Signaling with a Warranty

Will the seller with a lemon offer the warranty?
Marginal Benefit (MB) from offering the warranty is $1,000.
Marginal Cost (MC) from offering the warranty is .7*1500=$1,050.

Will the seller with a peach offer the warranty?
Marginal Benefit (MB) from offering the warranty is $1,000.
Marginal Cost (MC) from offering the warranty is .1*1500=$150.
MB<MC for seller with lemon and MB>MC for seller with peach.
Therefore, seller with peach can credibly signal to buyer that
the car is a peach by offering the above warranty.
Example 2: Signaling in National
Football League Contract Negotiations

Time Table for “Rookies”
Draft Day - Late April
Start of Training Camp – Early July
Start of Regular Season – Late August
Example 2: Signaling in National
Football League Contract Negotiations
Draft

Prior to the draft, teams obtain information (size,
strength, speed, character and intelligence) about
players through interviews, pre-draft workouts and game
films.

Each NFL team is given one draft pick in each round to
select a player or trade. The order in which teams draft
in each round depends on the teams’ performance the
previous season.

The team that drafts the player has the “rights” to that
player for at least a year.
Example 2: Signaling in National
Football League Contract Negotiations
Training Camp

Teams hold training camps so the players can learn the
team’s offensive and defensive systems and achieve
proper conditioning.
Contract Negotiations



The majority of drafted players hire agents to negotiate
their contracts.
Negotiations might occur in a series of meetings or a
series of phone calls.
Drafted players sign what is termed a Standard Form
Contract (SFC). These contracts are almost always nonguaranteed.
Example 2: Signaling in National
Football League Contract Negotiations
Guaranteed
 Representative Contract
Non-Guaranteed
Year
1991
Signing
Base
Reporting
Bonus
Salary
Bonus
$250,000 $150,000
1992
$170,000
1993
$190,000
$20,000
Summary Statistics of Contract Data
Example 2: Signaling in National
Football League Contract Negotiations
1.
2.
3.
4.
What are the different manners by which a
player can signal his private information?
Propose a contract with a small fraction of
the compensation in guaranteed money
(i.e., small signing bonus).
Propose a contract with a lot of incentive
clauses in the contract.
Negotiate a short contract.
Hold out and miss part of training camp.
Example 2: Signaling in National
Football League Contract Negotiations
On the sidelines: An annual Economic
Analysis of the National Football League
prepared for members of the NFL Players
Association
1.
“… never recovered from his holdout and remains a
reserve.... Maybe his agents should have recognized
that he was a player who needed to be in camp early....”
2.
“(The holdout) made my first year kind of rough. When I
got into camp it took a while to get adjusted...”.
Illustration of why player can signal by holding
out and missing part of training camp
Consider a player who can obtain a oneyear, non-guaranteed contract worth
$200,000 if he signs before the start of
training camp or can obtain a one-year,
non-guaranteed contract worth $250,000
if he holds out and signs 5 days after the
start of training camp. If the player does
not make the team, he can make $50,000
selling insurance.
Illustration of why player can signal by holding
out and missing part of training camp
Suppose the player can either have
negative private information or positive
private information. For example, the
player could know that the injury to his
right knee in college is still bothering him
(negative private information) or that he
did not perform as well as he should
have in college because his coach did
not like him (positive private
information).
Illustration of why player can signal by holding
out and missing part of training camp
Player with negative private information
If he signs before training camp, his probability
of making the team is .6. If he holds out and
signs after the start of training camp, his
probability of making the team is .3.
Expected payoff from signing before training
camp is .6($200,000)+.4($50,000)=$140,000
Expected payoff from signing after training camp
is .3($250,000)+.7($50,000)=$110,000
Player with negative information agrees to $200k
contract prior to the start of training camp.
Illustration of why player can signal by holding
out and missing part of training camp
Player with positive private information
If he signs before training camp, his probability
of making the team is .75. If he holds out and
signs after the start of training camp, his
probability of making the team is .6.
Expected payoff from signing before training
camp is .75($200,000)+.25($50,000)=$162,500
Expected payoff from signing after training camp
is .6($250,000)+.4($50,000)=$170,000
Player with positive information agrees to $250k
contract after the start of training camp.
Team’s Decision
 Team
is willing to pay a player
who signs after the start of
training camp more because the
team realizes that the player is
signaling his positive private
information.
Example 2: Signaling in National
Football League Contract Negotiations
On the sidelines: An annual Economic
Analysis of the National Football
League prepared for members of the
NFL Players Association
“When a contract is signed has a major impact
on what gets signed. For draftees especially,
early deals as a rule produce numbers not only
below the final averages in a round, but in many
cases also under averages from the previous
season.”
What the data should reveal if players with
positive private information sign after the start of
training camp.

Players who sign after the start of training
camp should receive more lucrative
contracts and perform better (perhaps not
in their first year) than players who sign
before the start of training camp
(conditional on when they were selected in
the draft, their position, the team that
drafted them, etc…).
Proportion that “Make Team” and
Mean Number of Starts
Proportion that “Make Team” and
Mean Number of Starts
Conclusions
Conditional on Round Drafted, Players
who sign after the start of training camp
are more likely to “make the team” than
players who sign before training camp.
 Conditional on Round Drafted, Players
who sign after the start of training camp
start less games the first year after being
drafted and more game the third year after
being drafted than players who sign before
training camp.

What does this have
to do with you
interviewing for a job
and negotiating a
compensation
package?