| By: |
Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich);
Markus Lang (Institute for Strategy and Business Economics, University of Zurich);
Alexander Rathke (Institute for Empirical Research in Economics, University of Zurich) |
| Abstract: |
This article provides a standard "Fort and Quirk"-style model of a
professional team sports league and analyzes the combined effect of salary
restrictions (caps and floors) and revenue-sharing arrangements. It shows that
the invariance proposition does not hold even under Walrasian conjectures if
revenue sharing is combined with either a salary cap or a salary floor. In
leagues with a binding salary cap for large clubs but no binding salary floor
for small clubs, revenue sharing will decrease the competitive balance and
increase club profits. Moreover, a salary cap produces a more balanced league
and decreases the cost per unit of talent. The effect of a more restrictive
salary cap on the profits of the small clubs is positive, whereas the effects
on the profits of the large clubs as well as on aggregate profits are
ambiguous. In leagues with a binding salary floor for the small clubs but no
binding salary cap for the large clubs, revenue sharing will increase the
competitive balance. Moreover, revenue sharing will decrease (increase) the
profits of large (small) clubs. Implementing a more restrictive salary floor
produces a less balanced league and increases the cost per unit of talent.
Furthermore, a salary floor will result in lower profits for all clubs. |
| Keywords: |
Team sports leagues, invariance proposition, competitive balance, revenue sharing, salary cap, salary floor |
| JEL: |
C72 L11 L83 |
| Date: |
2009 |
| URL: |
http://d.repec.org/n?u=RePEc:iso:wpaper:0102&r=spo |