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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/rsd/CRSA_WPS/23_CRSA_full.pdf
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Bibliographic Info

Paper provided by University of Zurich, Center for Research in Sports Administration (CRSA) in its series Working Papers with number 0023.

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Length: 20 pages
Date of creation: May 2008
Date of revision: Jul 2009
Handle: RePEc:rsd:wpaper:0023

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

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References

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  1. 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.
  2. 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.
  3. Vrooman, John, 2000. "The Economics of American Sports Leagues," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(4), pages 364-98, September.
  4. Thomas Hoehn & Stefan Szymanski, 1999. "The Americanization of European football," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 203-240, 04.
  5. 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).
  6. 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.
  7. Helmut M. Dietl & Markus Lang & Stephan Werner, 2009. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 375-396, October.
  8. 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.
  9. Brad R. Humphreys, 2002. "Alternative Measures of Competitive Balance in Sports Leagues," Journal of Sports Economics, , vol. 3(2), pages 133-148, 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. Késenne S., 1999. "Revenue sharing and competitive balance in professional team sports," Working Papers 1999019, University of Antwerp, Faculty of Applied Economics.
  12. 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.
  13. 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.
  14. 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.
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