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Welfare Effects of Salary Caps in Sports Leagues with Win-Maximizing Clubs

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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)
Alexander Rathke () (Institute for Empirical Research in Economics, University of Zurich)

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Abstract

This paper studies the welfare effect of a percentage-of-revenue salary cap in a team sports league with win-maximizing clubs. It shows that a percentage-of-revenue cap increases competitive balance and decreases overall salary payments in the league. This can lead to a decrease in the quality of the league. A percentage-of-revenue cap, however, will increase social welfare if the weight on aggregate club surplus in the welfare function is sufficiently high. If, on the other hand, fans' preferences for aggregate talent are sufficiently high then the percentage-of-revenue cap will always increase social welfare, no matter how much weight the league puts on financial stability.

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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 0086.

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Length: 22 pages
Date of creation: Jul 2008
Date of revision: Oct 2009
Handle: RePEc:iso:wpaper:0086

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Related research
Keywords: Salary Caps; Salary Restrictions; Social Welfare; Competitive Balance; Team Sports League;

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Find related papers by JEL classification:
D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
D60 - Microeconomics - - Welfare Economics - - - General
L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Recreation; Tourism

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References listed on IDEAS
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  1. Sonia Falconieri & Frédéric Palomino & József Sákovics, 2004. "Collective Versus Individual Sale of Television Rights in League Sports," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 833-862, 09. [Downloadable!] (restricted)
  2. Késenne Stefan, 2003. "The salary cap proposal of the G-14 in European football," Working Papers 2003018, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
  3. Helmut M. Dietl & Markus Lang, 2008. "The Effect Of Gate Revenue Sharing On Social Welfare," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 448-459, 07. [Downloadable!] (restricted)
    Other versions:
  4. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
  5. Kesenne, Stefan, 2000. "The Impact of Salary Caps in Professional Team Sports," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(4), pages 422-30, September. [Downloadable!] (restricted)
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  6. Cyrenne, Philippe, 2001. "A Quality-of-Play Model of a Professional Sports League," Economic Inquiry, Oxford University Press, vol. 39(3), pages 444-52, July.
  7. Helmut M. Dietl & Egon Franck & Markus Lang, 2008. "Overinvestment In Team Sports Leagues: A Contest Theory Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 353-368, 07. [Downloadable!] (restricted)
    Other versions:
  8. Stefan Szymanski & Stefan KÈsenne, 2004. "Competitive balance and gate revenue sharing in team sports," Journal of Industrial Economics, Blackwell Publishing, vol. 52(1), pages 165-177, 03. [Downloadable!] (restricted)
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  9. Thomas Hoehn & Stefan Szymanski, 1999. "The Americanization of European football," Economic Policy, CEPR, CES, MSH, vol. 14(28), pages 203-240, 04. [Downloadable!] (restricted)
  10. Peter J. Sloane, 2000. "The Regulation of Professional Team Sports," IASE Conference Papers 0003, International Association of Sports Economists. [Downloadable!]
  11. Sloane, Peter J, 1971. "The Economics of Professional Football: The Football Club as a Utility Maximiser," Scottish Journal of Political Economy, Scottish Economic Society, vol. 18(2), pages 121-46, June.
  12. Helmut Dietl & Markus Lang & Alexander Rathke, 2007. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," Working Papers 0072, University of Zurich, Institute for Strategy and Business Economics (ISU). [Downloadable!]
    Other versions:
  13. Helmut Dietl & Egon Franck & Stephan Nüesch, 2005. "Are Voluntary Salary Cap Agreements Self-Enforcing?," Working Papers 0040, University of Zurich, Institute for Strategy and Business Economics (ISU).
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