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The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues

Author

Listed:
  • Helmut Dietl

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

  • Markus Lang

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

  • Stephan Werner

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

Abstract

This paper provides a game-theoretic model of a professional sports league and analyzes the effect of luxury taxes on competitive balance, club profits and social welfare. We show that a luxury tax increases aggregate salary payments in the league as well as produces a more balanced league. Moreover, a higher tax rate increases the profits of large-market clubs, whereas the profits of small-market clubs only increase if the tax rate is not set inadequately high. Finally, we show that social welfare increases with a luxury tax.

Suggested Citation

  • Helmut Dietl & Markus Lang & Stephan Werner, 2008. "The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues," Working Papers 0823, International Association of Sports Economists;North American Association of Sports Economists, revised Jun 2009.
  • Handle: RePEc:spe:wpaper:0823
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    References listed on IDEAS

    as
    1. 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.
    2. Olugbenga Ajilore & Joshua Hendrickson, 2005. "The impact of the luxury tax on competitive balance in Major League Baseball," IASE Conference Papers 0517, International Association of Sports Economists.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Daniel R. Marburger, 1997. "Gate Revenue Sharing And Luxury Taxes In Professional Sports," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 114-123, April.
    8. Stefan Kesenne, 2000. "Revenue Sharing and Competitive Balance in Professional Team Sports," Journal of Sports Economics, , vol. 1(1), pages 56-65, February.
    9. 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.
    10. Babatunde Buraimo & Rob Simmons, 2008. "Competitive Balance and Attendance in Major League Baseball: An Empirical Test of the Uncertainty of Outcome Hypothesis," International Journal of Sport Finance, Fitness Information Technology, vol. 3(3), pages 146-155, August.
    11. Brian P. Soebbing, 2008. "Competitive Balance and Attendance in Major League Baseball: An Empirical Test of the Uncertainty of Outcome Hypothesis," International Journal of Sport Finance, Fitness Information Technology, vol. 3(2), pages 119-126, May.
    12. Vrooman, John, 2000. "The Economics of American Sports Leagues," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(4), pages 364-398, September.
    13. 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.
    14. 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.
    15. Brad R. Humphreys, 2002. "Alternative Measures of Competitive Balance in Sports Leagues," Journal of Sports Economics, , vol. 3(2), pages 133-148, May.
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    Cited by:

    1. Fort, Rodney & Maxcy, Joel & Diehl, Mark, 2016. "Uncertainty by regulation: Rottenberg׳s invariance principle," Research in Economics, Elsevier, vol. 70(3), pages 454-467.
    2. 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.
    3. Martín González Eiras & Nikolaj A. Harmon & Martín Rossi, 2017. "Fundamentals and Optimal Institutions: The case of US sports leagues," Working Papers 128, Universidad de San Andres, Departamento de Economia, revised Jan 2017.

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    More about this item

    Keywords

    Sports League; Luxury Tax; Social Welfare; Competitive Balance;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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