Salary Determination in the Presence of Fixed Revenues

David J. Berri
Michael A. Leeds
and Peter von Allmen

The assumption that workers are paid their marginal product underlies the theory of competitive labor markets and is the basis for comparison with non-competitive markets. Many firms, however, generate revenue in fixed lump-sums that are unrelated to the efforts of current workers. For example, many professional sports receive substantial income from broadcast rights, which are negotiated at wide intervals. We develop a theory of compensation in the presence of “fixed revenue” and test our theory using data from the National Basketball Association. Our results indicate that TV revenue tends to equalize players’ salaries. Players’ performance and popularity tend to enhance players’ bargaining positions. Popularity with fans particularly helps players with greater bargaining power.