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

  • Egon Franck


    (Department of Business Administration, University of Zurich)

  • Markus Lang


    (Department of Business Administration, University of Zurich)

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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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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  1. KÉSENNE, Stefan, . "Revenue sharing and competitive balance in professional team sports," Working Papers 1999019, University of Antwerp, Faculty of Applied Economics.
  2. Helmut Dietl & Egon Franck & Markus Lang, 2005. "Overinvestment in Team Sports Leagues: A Contest Theory Model," Working Papers 0002, University of Zurich, Center for Research in Sports Administration (CRSA), revised 2007.
  3. Martin Grossmann & Helmut Dietl & Markus Lang, 2007. "Revenue Sharing and Competitive Balance in a Dynamic Contest Model," Working Papers 0070, University of Zurich, Institute for Strategy and Business Economics (ISU), revised May 2009.
  4. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Salary Cap Regulation in Professional Team Sports," Working Papers 0020, University of Zurich, Center for Research in Sports Administration (CRSA), revised Nov 2010.
  5. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs," Working Papers 0022, University of Zurich, Center for Research in Sports Administration (CRSA), revised Jul 2009.
  6. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
  7. Egon Franck, 2010. "Private Firm, Public Corporation or Member’s Association Governance Structures in European Football," International Journal of Sport Finance, Fitness Information Technology, vol. 5(2), pages 108-127, May.
  8. 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.
  9. 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.
  10. 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.
  11. Helmut Dietl & Markus Lang & Alexander Rathke, 2009. "The Combined Effect of Salary Restrictions and Revenue Sharing in Sports Leagues," Working Papers 0102, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Jan 2010.
  12. 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.
  13. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
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