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Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs

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Author Info

  • Helmut Dietl

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

  • Markus Lang

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

  • Stephan Werner

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

Abstract

This paper develops a contest model to compare social welfare in homogeneous leagues in which all clubs maximize identical objective functions with mixed leagues in which clubs maximize different objective functions. We show that homogeneous leagues in which all clubs are profit-maximizers dominate all other leagues whereas mixed leagues in which small-market clubs are profit- and large-market clubs are win-maximizers (type-I mixed leagues) are dominated by all other leagues. In addition, we show that, from a welfare perspective, large-market clubs win too often in (purely) win-maximizing and type-I mixed leagues whereas small-market clubs win too many games in (purely) profit-maximizing leagues and in mixed leagues in which large-market clubs are profit- and small-market clubs are win-maximizers (type-II mixed leagues). These results have important policy implications: Social welfare will increase if clubs are reorganized from non-profit members associations to profit-maximizing corporations. Moreover, it is socially desirable to reorganize large-market clubs first because, in mixed leagues, it is better if large-market clubs maximize profits instead of small-market clubs. Finally, we show that the invariance proposition does not hold in any league. In mixed (homogeneous) leagues, revenue sharing decreases (increases) social welfare. Given these results, homogeneous leagues should introduce revenue sharing; mixed leagues should not.

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Bibliographic Info

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0090.

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Length: 33 pages
Date of creation: 2008
Date of revision: Jul 2009
Handle: RePEc:iso:wpaper:0090

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Keywords: Social welfare; team sports leagues; objective functions; mixed leagues; competitive balance;

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References

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  1. KÉSENNE, Stefan, . "Revenue sharing and competitive balance in professional team sports," Working Papers 1999019, University of Antwerp, Faculty of Applied Economics.
  2. John Vrooman, 2007. "Theory Of The Beautiful Game: The Unification Of European Football," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(3), pages 314-354, 07.
  3. Helmut Dietl & Markus Lang, 2006. "The Effect of Gate Revenue-Sharing on Social Welfare," Working Papers 0060, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2007.
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  8. Helmut Dietl & Egon Franck & Markus Lang, 2005. "Overinvestment in Team Sports Leagues: A Contest Theory Model," Working Papers 0002, University of Zurich, Center for Research in Sports Administration (CRSA), revised 2007.
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  10. Helmut Dietl & Markus Lang & Alexander Rathke, 2007. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," Working Papers 0016, University of Zurich, Center for Research in Sports Administration (CRSA).
  11. Scott E. Atkinson & Linda R. Stanley & John Tschirhart, 1988. "Revenue Sharing as an Incentive in an Agency Problem: An example from the National Football League," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 27-43, Spring.
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  18. Stefan Szymanski & Stefan KÈsenne, 2004. "Competitive balance and gate revenue sharing in team sports," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 165-177, 03.
  19. Christian Riis & Derek J. Clark, 1997. "Contest success functions: an extension," Economic Theory, Springer, vol. 11(1), pages 201-204.
  20. 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.
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  22. Stefan Szymanski, 2006. "Tilting the Playing Field: Why a sports league planner would choose less, not more, competitive balance," Working Papers 0620, International Association of Sports Economists & North American Association of Sports Economists.
  23. John Creedy, 2003. "The Excess Burden of Taxation and Why it (Approximately) Quadruples When the Tax Rate Doubles," Treasury Working Paper Series 03/29, New Zealand Treasury.
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