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A Theoretical Analysis of the Influence of Money Injections on Risk Taking in Football Clubs

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Author Info

  • Egon Franck

    ()
    (Department of Business Administration, University of Zurich)

  • Markus Lang

    ()
    (Department of Business Administration, University of Zurich)

Abstract

Third party money injections of benefactors (sugar daddies) function as a bailout mechanism for otherwise insolvent football clubs. The successful implementation of the new UEFA "financial fair play" regulations will abrogate this bailout mechanism. We develop a theoretical model of a representative club and a sugar daddy to study the adverse incentive effects produced by the money injections of sugar daddies. We show that the existence of a sugar daddy induces the club to choose a riskier investment strategy and the more the sugar daddy commits to bailout the club, the more the clubs' optimal level of riskiness increases. Moreover, a private sugar daddy bails out the club less often than a public sugar daddy. Our model further shows that a "too-big-to-fail" phenomenon exists because it is optimal to always bailout a club if its market size is sufficiently large. Finally, we derive conditions under which the FFP and the pre-FFP regulations, respectively, are desirable from a welfare perspective.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/160_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 0160.

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Length: 30 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iso:wpaper:0160

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Keywords: Regulation; sports; UEFA; risk; bailout;

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References

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  1. Helmut Dietl & Egon Franck & Markus Lang, 2005. "Overinvestment in Team Sports Leagues: A Contest Theory Model," Working Papers 0038, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2007.
  2. Martin Grossmann & Helmut Dietl & Markus Lang, 2010. "Revenue Sharing and Competitive Balance in a Dynamic Contest Model," Review of Industrial Organization, Springer, vol. 36(1), pages 17-36, February.
  3. Tim Pawlowski & Christoph Breuer & Arnd Hovemann, 2010. "Top Clubs' Performance and the Competitive Situation in European Domestic Football Competitions," Journal of Sports Economics, , vol. 11(2), pages 186-202, April.
  4. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Working Papers 0090, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Jul 2009.
  5. Helmut M. Dietl & Markus Lang & Alexander Rathke, 2011. "The Combined Effect Of Salary Restrictions And Revenue Sharing In Sports Leagues," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 447-463, 04.
  6. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Salary Cap Regulation in Professional Team Sports," Working Papers 0086, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Nov 2010.
  7. Egon Franck, . "Private Firm, Public Corporation or Member`s Association – Governance Structures in European Football," Working Papers 0106, University of Zurich, Institute for Strategy and Business Economics (ISU).
  8. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
  9. Thomas Peeters, 2011. "TV Revenue Sharing as a Coordination Device in Sports Leagues," Working Papers 1109, International Association of Sports Economists & North American Association of Sports Economists.
  10. Markus Lang & Martin Grossmann & Philipp Theiler, 2011. "The Sugar Daddy Game: How Wealthy Investors Change Competition in Professional Team Sports," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 557-577, December.
  11. Stefan Kesenne, 2000. "Revenue Sharing and Competitive Balance in Professional Team Sports," Journal of Sports Economics, , vol. 1(1), pages 56-65, February.
  12. Liam J. A. Lenten, 2008. "Unbalanced Schedules And The Estimation Of Competitive Balance In The Scottish Premier League," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(4), pages 488-508, 09.
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Cited by:
  1. PEETERS, Thomas & SZYMANSKI, Stefan, 2013. "Financial fair play in European football," Working Papers 2013021, University of Antwerp, Faculty of Applied Economics.
  2. PEETERS, Thomas & SZYMANSKI, Stefan, 2012. "Vertical restraints in soccer: Financial fair play and the English Premier League," Working Papers 2012028, University of Antwerp, Faculty of Applied Economics.

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