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Does a Win Bonus Help to Increase Profits or Wins on Professional Sports Teams?

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  • Stefan Kesenne

    () (University of Antwerp and Catholic University of Leuven)

Abstract

In a sports league, team owners can expect to increase player performance, and the team’s winning percentage or profits, by providing a win bonus on top of the players’ fixed salary level. In some clubs, the guaranteed player salary is relatively low and the premium, in case of a winning game, relatively high, whereas in other clubs, hardly any win bonus is paid. In this theoretical paper, we investigate what the impact of a win bonus is on the winning percentage, the competitive balance, the owner profits, and the overall quality in a professional sports league. The model we start from is an extension of the well-known Quirk and Fort (1992) two-team model and we introduce a premium system consisting of a win bonus that is paid on top of a fixed salary. Assuming that players are motivated to increase effort if their salary depends on the winning percentage, we derive the Nash-Cournot equilibrium under both the profit and a win maximization hypothesis. The impact of a premium system turns out to be rather complex, given the fact that clubs react to the strategies of other clubs in the league. The team that introduces a premium system can expect to increase its profits or its winning percentage by paying a bonus combined with a reduced fixed salary. A crucial factor, though, is the players’ response to the win bonus. If the team’s effort is not enhanced enough by the bonus, the team’s profits and wining percentage can go down. Also the effect that an increased winning percentage has on the current season revenue is an important factor.

Suggested Citation

  • Stefan Kesenne, 2007. "Does a Win Bonus Help to Increase Profits or Wins on Professional Sports Teams?," International Journal of Sport Finance, Fitness Information Technology, vol. 2(3), pages 142-148, August.
  • Handle: RePEc:jsf:intjsf:v:2:y:2007:i:3:p:142-148
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    References listed on IDEAS

    as
    1. Paul, Rodney J. & Weinbach, Andrew P., 2007. "The uncertainty of outcome and scoring effects on Nielsen ratings for Monday Night Football," Journal of Economics and Business, Elsevier, vol. 59(3), pages 199-211.
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    3. Daniel Rascher, 1997. "A model of a professional sports league," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 3(3), pages 327-328, August.
    4. Kanazawa, Mark T & Funk, Jonas P, 2001. "Racial Discrimination in Professional Basketball: Evidence from Nielsen Ratings," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 599-608, October.
    5. Kahn, Lawrence M & Sherer, Peter D, 1988. "Racial Differences in Professional Basketball Players' Compensation," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 40-61, January.
    6. Stefan Kesenne & Wilfried Pauwels, 2006. "Club Objectives and Ticket Pricing in Professional Team Sports," Eastern Economic Journal, Eastern Economic Association, vol. 32(3), pages 549-560, Summer.
    7. Christopher R. Bollinger & Julie L. Hotchkiss, 2003. "The Upside Potential of Hiring Risky Workers: Evidence from the Baseball Industry," Journal of Labor Economics, University of Chicago Press, vol. 21(4), pages 923-944, October.
    8. Hausman, Jerry A & Leonard, Gregory K, 1997. "Superstars in the National Basketball Association: Economic Value and Policy," Journal of Labor Economics, University of Chicago Press, vol. 15(4), pages 586-624, October.
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    More about this item

    Keywords

    professional team sports; win bonus; Nash-Cournot equilibrium;

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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