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Overinvestment in Team Sports Leagues: A Contest Theory Model

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Author Info
Helmut Dietl () (Institute for Strategy and Business Economics, University of Zurich)
Egon Franck () (Institute for Strategy and Business Economics, University of Zurich)
Markus Lang () (Institute for Strategy and Business Economics, University of Zurich)

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Abstract

This paper applies contest theory to provide an integrated framework of a team sports league and analyses the competitive interaction between clubs. We show that dissipation of the league revenue arises from `overinvestment' in playing talent as a direct consequence of the ruinous competitive interaction between clubs. This overinvestment problem increases if the discriminatory power of the contest function increases, revenue-sharing decreases, and the size of an additional exogenous prize increases. We further show that clubs invest more when they play in an open compared to a closed league. Moreover, the overinvestment problem within open leagues increases with the revenue differential between leagues.

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File URL: http://www.isu.uzh.ch/static/ISU_WPS/38_ISU_full.pdf
File Format: application/pdf
File Function: First version, 2005
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Publisher Info
Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0038.

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Length: 22 pages
Date of creation: 2005
Date of revision: 2007
Handle: RePEc:iso:wpaper:0038

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Related research
Keywords: contests; sports league; overinvestment; revenue-sharing; promotion and relegation;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Recreation; Tourism
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Baye, M.R. & Kovenock, D., 1993. "The Solution to the Tullock Rent-Seeking Game When R > 2: Mixed Strategy Equilibria and Mean Dissipation Rates," Papers 9368, Tilburg - Center for Economic Research.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Helmut Dietl & Tobias Duschl & Egon Franck & Markus Lang, 2009. "A Contest Model of a Professional Sports League with Two-Sided Markets," Working Papers 0912, International Association of Sports Economists. [Downloadable!]
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  2. Helmut Dietl & Egon Franck & Martin Grossmann & Markus Lang, 2009. "Contest Theory and its Applications in Sports," Working Papers 0913, International Association of Sports Economists. [Downloadable!]
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  3. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Revenue Sharing, Reserve Clause and Salary Caps in Professional Team Sports Leagues," Working Papers 0100, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2009. [Downloadable!]
  4. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Welfare Effects of Salary Caps in Sports Leagues with Win-Maximizing Clubs," Working Papers 0086, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Oct 2009. [Downloadable!]
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