Draft Insurance for College Hoopsters:

My colleagues Tom Hazlett and Josh Wright have a proposal for responding to the incentives for college basketball players to leave college early and to to turn pro--draft insurance for college underclassmen paid for by the university. They admit that for athletes from financially poor backgrounds this won't provide much of an incentive to stay, but for others it might. The premise is that there are some athletes who would like to stay, but simply can't afford it. For many top basketball players (such as Kevin Love), the marginal benefit of staying is relatively small in the sense that he may work up a few slots in the draft order but the marginal cost is quite high in the sense that a poor season could reduce his draft stock substantially. Right now the NCAA allows players to buy insurance for major career-ending injuries but not for minor injuries or performance declines that reduce draft position. Current rules also prohibit the insitution from paying for the insurance.

Here's Tom and Josh's wrap up:

Second, we posit that there are two reasons that freshman stars are so likely to leave college early. One is that NBA salaries are high, and that each year a player waits to cash in is one very rich year they lose. Until the NCAA cartel is smashed, that problem is beyond our solution. But the second motive is to mitigate risk. One clumsy leap and a $7.6 million guaranteed contract—the expected price tag for this year's 12th NBA pick—goes poof! And, as financial economists will tell you, that first $7.6 million is probably more important to you than the next.

So the answer, given that universities cannot pay athletes market wages, is to at least insure them. Were underclassmen to be appraised, via draft rankings, and then offered compensation in the event—post-graduation—they slipped by some increment, they could hedge this very considerable exposure. The NCAA allows players to insure, but the player pays even though it is largely the university (and its fans) that benefits. Moreover, policies can only insure against career-ending injuries, leaving the more common outcomes—less serious injuries and performance-related changes in draft status—terrifying prospects.

The schools should extend broader coverage. The contracts we propose do not fully compensate college athletes for their valuable service, and would thus retain only some of the talent now jumping early to the pros. Yet, the approach would preserve the NCAA's "amateur" wink, while allowing student-athletes to play college ball until their 21st birthday without risking the family jewels. A slam dunk, really.