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The Effect of Salary Caps in Professional Team Sports on Social Welfare

Author

Listed:
  • Helmut Dietl

    (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

Increasing financial disparity and spiralling wages in European football have triggered a debate about the introduction of salary caps. This paper provides a theoretical model of a team sports leagues and studies the welfare effect of salary caps. It shows that salary caps will increase competitive balance and decrease overall salary payments within the league. The resulting effect on social welfare is counter-intuitive and depends on the preference of fans for aggregate talent and for competitive balance. A salary cap that binds only for large market clubs will increase social welfare if fans prefer aggregate talent despite the fact that the salary cap will result in lower aggregate talent. If fans prefer competitive balance, on the other hand, any binding salary cap will reduce social welfare.

Suggested Citation

  • Helmut Dietl & Markus Lang & Alexander Rathke, 2007. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," Working Papers 0016, University of Zurich, Center for Research in Sports Administration (CRSA).
    • Handle: RePEc:rsd:wpaper:0016
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Büch, Martin-Peter & Maennig, Wolfgang & Schulke, Hans-Jürgen (ed.), 2012. "Sport und Sportgroßveranstaltungen in Europa - zwischen Zentralstaat und Regionen," Edition HWWI, Hamburg Institute of International Economics (HWWI), volume 4, number 4.
    2. Helmut M. Dietl & Markus Lang & Stephan Werner, 2010. "The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues," International Journal of Sport Finance, Fitness Information Technology, vol. 5(1), pages 41-51, February.
    3. 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.
    4. 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, April.
    5. 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.
    6. Dietl Helmut & Duschl Tobias & Franck Egon & Lang Markus, 2012. "A Contest Model of a Professional Sports League with Two-Sided Markets," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(3), pages 336-359, June.
    7. Helmut Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2008. "Revenue Sharing, Reserve Clause and Salary Caps in Professional Team Sports Leagues," Working Papers 0100, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2009.
    8. Helmut M. Dietl & Egon Franck & Markus Lang & Alexander Rathke, 2012. "Salary Cap Regulation In Professional Team Sports," Contemporary Economic Policy, Western Economic Association International, vol. 30(3), pages 307-319, July.
    9. Helmut Dietl & Tobias Duschl & Markus Lang, 2010. "Gehaltsobergrenzen und Luxussteuern: Erkenntnisse aus dem professionellen Mannschaftssport," Working Papers 0039, University of Zurich, Center for Research in Sports Administration (CRSA).
    10. 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.
    11. Markus LANG & Alexander RATHKE & Marco RUNKEL, 2010. "The Economic Consequences Of Foreigner Rules In National Sports Leagues," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 31, pages 47-64.
    12. Helmut Dietl, 2010. "Besonderheiten des Sports ‐ Was rechtfertigt eine "eigene Ökonomik"?," Working Papers 0137, University of Zurich, Institute for Strategy and Business Economics (ISU).
    13. Marco Runkel, 2022. "Player Mobility and Competitive Balance Regulation in Professional Sports Leagues," Journal of Sports Economics, , vol. 23(4), pages 479-500, May.
    14. 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.
    15. Dietl, Helmut & Duschl, Tobias, 2012. "The organization of professional sports leagues: A comparison of European and North-American leagues from the perspective of platform organization," Edition HWWI: Chapters, in: Büch, Martin-Peter & Maennig, Wolfgang & Schulke, Hans-Jürgen (ed.), Sport und Sportgroßveranstaltungen in Europa - zwischen Zentralstaat und Regionen, volume 4, pages 111-126, Hamburg Institute of International Economics (HWWI).
    16. Evan S. Totty & Mark F. Owens, 2011. "Salary Caps and Competitive Balance in Professional Sports Leagues," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 11(2), pages 46-56, Fall.
    17. Roberto Burguet & József Sákovics, 2019. "Bidding For Talent In Sport," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 85-102, January.
    18. 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).
    19. 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.
    20. Helmut Dietl & Markus Lang & Cornel Nesseler, 2017. "The Impact of Government Subsidies in Professional Team Sports Leagues," Working Papers 366, University of Zurich, Department of Business Administration (IBW).
    21. 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).
    22. Garcia-del-Barrio, Pedro & Agnese, Pablo, 2021. "Does Compliance with Financial Fair Play Rules Improve the Football Clubs' Sport Performance and Their Chances to Reach UEFA Competitions?," IZA Discussion Papers 14474, Institute of Labor Economics (IZA).
    23. Helmut Dietl & Egon Franck & Martin Grossmann & Markus Lang, 2009. "Contest Theory and its Applications in Sports," Working Papers 0029, University of Zurich, Center for Research in Sports Administration (CRSA).
    24. Helmut Dietl & Egon FrancK & Markus Lang & Alexander Rathke, 2008. "Welfare Effects of Salary Caps in Sports Leagues with Win-Maximizing Clubs," Working Papers 0825, International Association of Sports Economists;North American Association of Sports Economists.
    25. Helmut Dietl & Markus Lang & Alexander Rathke, 2009. "The Combined Effect of Salary Restrictions and Revenue Sharing on Club Profits, Player Salaries, and Competitive Balance," Working Papers 0909, International Association of Sports Economists;North American Association of Sports Economists.

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    More about this item

    Keywords

    Salary Caps; Social Welfare; Competitive Balance; Team Sports League;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D6 - Microeconomics - - Welfare Economics
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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