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Salary Cap Regulation in Professional Team Sports

Author

Listed:
  • Helmut Dietl

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

  • Egon Franck

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

  • Markus Lang

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

  • Alexander Rathke

    (Institute for Empirical Research in Economics, University of Zurich)

Abstract

This paper analyzes the effects of a percentage-of-revenue salary cap in a team sports league with win-maximizing clubs and flexible talent supply. It shows that a percentage-of-revenue cap produces a more balanced league and decreases aggregate salary payments. Taking into account the idiosyncrasies of European football, our paper further highlights the potential conflicts between the league and society. From the perspective of a league governing body, a percentage-of-revenue cap always enhances financial stability of win-maximizing clubs. A social planner, however, will not permit the introduction of such a cap if fans and players unduly suffer. This paper shows under which conditions the social planner accepts (rejects) a salary cap proposed by the league regulator.

Suggested Citation

  • 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.
  • Handle: RePEc:iso:wpaper:0086
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    References listed on IDEAS

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    1. 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.
    2. Helmut M. Dietl & Markus Lang & Stephan Werner, 2009. "Social Welfare in Sports Leagues with Profit‐Maximizing and/or Win‐Maximizing Clubs," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 375-396, October.
    3. Helmut M. Dietl & Egon Franck & Markus Lang, 2008. "Overinvestment In Team Sports Leagues: A Contest Theory Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 353-368, July.
    4. Dietl, Helmut M. & Franck, Egon & Hasan, Tariq & Lang, Markus, 2009. "Governance of professional sports leagues--Cooperatives versus contracts," International Review of Law and Economics, Elsevier, vol. 29(2), pages 127-137, June.
    5. 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, September.
    6. Helmut M. Dietl & Markus Lang, 2008. "The Effect Of Gate Revenue Sharing On Social Welfare," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 448-459, July.
    7. Helmut Dietl & Egon Franck & Markus Lang, 2008. "Why football players may benefit from the ‘shadow of the transfer system’," European Journal of Law and Economics, Springer, vol. 26(2), pages 129-151, October.
    8. KÉSENNE, Stefan, "undated". "The salary cap proposal of the G-14 in European football," Working Papers 2003018, University of Antwerp, Faculty of Business and Economics.
    9. Stefan Szymanski & Stefan Késenne, 2010. "Competitive Balance and Gate Revenue Sharing in Team Sports," Palgrave Macmillan Books, in: The Comparative Economics of Sport, chapter 7, pages 229-243, Palgrave Macmillan.
    10. 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.
    11. Helmut M. Dietl & Markus Lang & Stephan Werner, 2009. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 375-396, October.
    12. Stefan Szymanski, 2010. "The Economic Design of Sporting Contests," Palgrave Macmillan Books, in: The Comparative Economics of Sport, chapter 1, pages 1-78, Palgrave Macmillan.
    13. Stefan Kesenne, 2000. "Revenue Sharing and Competitive Balance in Professional Team Sports," Journal of Sports Economics, , vol. 1(1), pages 56-65, February.
    14. 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.
    15. Kesenne, Stefan, 2000. "The Impact of Salary Caps in Professional Team Sports," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(4), pages 422-430, September.
    16. 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 121-146, June.
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    Cited by:

    1. Brad R. Humphreys & Thomas J. Miceli, 2019. "The Peculiar Preferences of Sports Fans: Toward a Preference-Based Motivation for the Uncertainty of Outcome Hypothesis," Journal of Sports Economics, , vol. 20(6), pages 782-796, August.
    2. Oliver Gürtler & Markus Lang & Tim Pawlowski, 2015. "On the Release of Players to National Teams," Journal of Sports Economics, , vol. 16(7), pages 695-713, October.
    3. Egon Franck & Markus Lang, 2014. "A Theoretical Analysis of the Influence of Money Injections on Risk Taking in Football Clubs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(4), pages 430-454, September.
    4. Dietl Helmut M & Duschl Tobias & Lang Markus, 2011. "Executive Pay Regulation: What Regulators, Shareholders, and Managers Can Learn from Major Sports Leagues," Business and Politics, De Gruyter, vol. 13(2), pages 1-32, August.
    5. Budzinski, Oliver, 2017. "Market-internal financial regulation in sports as an anticompetitive institution," Ilmenau Economics Discussion Papers 110, Ilmenau University of Technology, Institute of Economics.
    6. Helmut Dietl & Rodney Fort & Markus Lang, 2011. "International Sports League Comparisons," Working Papers 0042, University of Zurich, Center for Research in Sports Administration (CRSA).
    7. Daniel Nicolae MAITA & Alexandra-Irina PADUREAN (BADEA) & Claudiu CRETU & Vasile APOSTOL, 2021. "Salary Cap Model €“ Influence Of Sports Leagues Competitiveness €“ National Basketball Association Vs National Hockey League In North America," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(1), pages 185-194, November.
    8. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2010. "Organizational Differences between U.S. Major Leagues and European Leagues: Implications for Salary Caps," Working Papers 0122, University of Zurich, Institute for Strategy and Business Economics (ISU).
    9. Nikolaos, Chatzistamoulou & Theodoros, Antonakis & Konstantinos, Kounetas, 2020. "Salary cap and National Basketball Association teams' productive performance. A two stage Data Envelopment Analysis approach under a metatechnology framework," MPRA Paper 98811, University Library of Munich, Germany.
    10. Nikos Chatzistamoulou & Kounetas Kostas & Antonakis Theodor, 2022. "Salary Cap, Organizational Gap, and Catch-up in the Performance of NBA Teams: A Two-Stage DEA Model Under Heterogeneity," Journal of Sports Economics, , vol. 23(2), pages 123-155, February.
    11. Liam J. A. Lenten, 2017. "A Formal Test for Asymmetry in the Uncertainty of Outcome Hypothesis," Journal of Sports Economics, , vol. 18(3), pages 253-270, April.
    12. Martin Grossmann & Andreas Hefti & Markus Lang, 2012. "Aggregative Contests and Ex-post Heterogeneity: the Case of the UEFA Champions League," Working Papers 0161, University of Zurich, Institute for Strategy and Business Economics (ISU).
    13. Andrews, Matt & Harrington, Peter, 2016. "Off Pitch: Football's Financial Integrity Weaknesses, and How to Strengthen Them," Working Paper Series 16-009, Harvard University, John F. Kennedy School of Government.
    14. Barth, Michael & Emrich, Eike & Daumann, Frank, 2017. "Evaluation of sporting success in Austria: An institutional economics analysis," Working Papers of the European Institute for Socioeconomics 20, European Institute for Socioeconomics (EIS), Saarbrücken.

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    More about this item

    Keywords

    Competitive balance; regulation; salary cap; social welfare; team sports leagues;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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