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The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues

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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 provides a game-theoretic model of a professional sports league and analyzes the effect of luxury taxes on competitive balance, club profits and social welfare. We show that a luxury tax increases aggregate salary payments in the league as well as produces a more balanced league. Moreover, a higher tax rate increases the profits of large-market clubs, whereas the profits of small-market clubs only increase if the tax rate is not set inadequately high. Finally, we show that social welfare increases with a luxury tax.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/91_ISU_full.pdf
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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 0091.

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Length: 20 pages
Date of creation: May 2008
Date of revision: Jul 2009
Handle: RePEc:iso:wpaper:0091

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Keywords: Sports League; Luxury Tax; Social Welfare; Competitive Balance;

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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.
  2. Babatunde Buraimo & Rob Simmons, 2008. "Competitive Balance and Attendance in Major League Baseball: An Empirical Test of the Uncertainty of Outcome Hypothesis," International Journal of Sport Finance, Fitness Information Technology, vol. 3(3), pages 146-155, August.
  3. Dietl Helmut M & Lang Markus & Rathke Alexander, 2009. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-23, April.
  4. Rodney Fort & James Quirk, 1995. "Cross-subsidization, Incentives, and Outcomes in Professional Team Sports Leagues," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1265-1299, September.
  5. Stefan Kesenne, 2000. "Revenue Sharing and Competitive Balance in Professional Team Sports," Journal of Sports Economics, , vol. 1(1), pages 56-65, February.
  6. Daniel R. Marburger, 1997. "Gate Revenue Sharing And Luxury Taxes In Professional Sports," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 114-123, 04.
  7. 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.
  8. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Working Papers 0826, International Association of Sports Economists & North American Association of Sports Economists.
  9. Brian P. Soebbing, 2008. "Competitive Balance and Attendance in Major League Baseball: An Empirical Test of the Uncertainty of Outcome Hypothesis," International Journal of Sport Finance, Fitness Information Technology, vol. 3(2), pages 119-126, May.
  10. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
  11. Vrooman, John, 2000. "The Economics of American Sports Leagues," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(4), pages 364-98, September.
  12. Késenne S., 1999. "The impact of salary caps in professional team sports," Working Papers 1999026, University of Antwerp, Faculty of Applied Economics.
  13. Helmut Dietl & Markus Lang, 2006. "The Effect of Gate Revenue-Sharing on Social Welfare," Working Papers 0012, University of Zurich, Center for Research in Sports Administration (CRSA), revised 2007.
  14. Brad R. Humphreys, 2002. "Alternative Measures of Competitive Balance in Sports Leagues," Journal of Sports Economics, , vol. 3(2), pages 133-148, May.
  15. Thomas Hoehn & Stefan Szymanski, 1999. "The Americanization of European football," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 203-240, 04.
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