Rank-based groupings and decision making: A regression discontinuity analysis of the NFL draft rounds and rookie compensation

Rank-based groupings are uninformative signals of quality when the exact rank is known; therefore, they should be ignored in decision making. However, evidence is presented that rank-based groupings are used to determine the compensation of rookie players in the National Football League (NFL). The NFL draft, which largely determines rookie compensation, provides two signals of player quality, selection number, and round. However, the rounds are simply groupings based on selection number; thus, the rounds should not affect subsequent decisions. Sharp regression discontinuity design (RDD) estimates of discontinuities in rookie compensation at the round cutoffs are shown to be very large and robust. The first to second round discontinuity isUS$240,000 toUS$250,000, or 36 % of the average salary of the first selection in the second round. The second to third round discontinuity is US$60,000 to US$70,000, or 17 % of the average salary of the first selection in the third round. The results show rookie compensation, which comprises a large share of career earnings, is subject to heuristic thinking