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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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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/160_ISU_full.pdf
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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. 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.
  2. 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.
  3. Martin Grossmann & Markus Lang & Philipp Theiler, 2010. "The Sugar Daddy's Game: How Wealthy Investors Change Competition in Professional Team Sports," Working Papers 0128, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Oct 2010.
  4. 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.
  5. Martin Grossmann & Helmut Dietl & Markus Lang, 2008. "Revenue Sharing and Competitive Balance in a Dynamic Contest Model," Working Papers 0822, International Association of Sports Economists;North American Association of Sports Economists, revised Nov 2009.
  6. 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.
  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. 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.
  9. 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.
  10. 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.
  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. 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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