Moral Hazard within the firm-Do firms drive down the market value of their employees?

Employee poaching by competitors is a common phenomenon in many highly competitive industries- the most prominent of these is the market for sports players where free agency provides agents with a chance to change employers in order to gain a higher salary. We construct a theory model where firms know the true value of their employees and the employees are signed to a fixed wage contract for a pre-specified period of time. However the signal of employees’ ability to other potential hirers is based only on the level of ‘opportunity’ given to him by the current employer. We postulate that the agent’s current firm might give him limited opportunity in the last year of his contract, even at the cost of lowering their own current profits. This might benefit the firm in the long run since it lowers market expectations of the agent’s true ability enabling them to sign the agent to another contract at a lower rate. We test this empirically using a dataset we construct of characteristics, playing time and contract details for 654 National Basketball Association players.