The effect of competition on the demand for skilled labor: Matching with externalities in the NBA

I study how heterogeneity in competition can affect the demand for skilled labor in a way that generates a dispersion in productivity across otherwise similar firms. This 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 firm and worker depends on the entire allocation of matches. I find that competition has a significant effect on hiring decisions in the National Basketball Association, resulting in a clustering of talent among rivals. A counterfactual shows that competition in the league's playoff format explains 17.59% of the widely observed gap in talent between the league's two conferences.