The Combined Effect of Salary Restrictions and Revenue Sharing on Club Profits, Player Salaries, and Competitive Balance

Helmut Dietl, Markus Lang and Alexander Rathke

No 909, Working Papers from International Association of Sports Economists, North American Association of Sports Economists

Abstract: This article provides a standard "Fort and Quirk"-style model of a professional team sports league and analyzes the combined effect of salary restrictions (caps and floors) and revenue-sharing arrangements. It shows that the invariance proposition does not hold even under Walrasian conjectures if revenue sharing is combined with either a salary cap or a salary floor. In leagues with a binding salary cap for large clubs but no binding salary floor for small clubs, revenue sharing will decrease the competitive balance and increase club profits. Moreover, a salary cap produces a more balanced league and decreases the cost per unit of talent. The effect of a more restrictive salary cap on the profits of the small clubs is positive, whereas the effects on the profits of the large clubs as well as on aggregate profits are ambiguous. In leagues with a binding salary floor for the small clubs but no binding salary cap for the large clubs, revenue sharing will increase the competitive balance. Moreover, revenue sharing will decrease (increase) the profits of large (small) clubs. Implementing a more restrictive salary floor produces a less balanced league and increases the cost per unit of talent. Furthermore, a salary floor will result in lower profits for all clubs.

Keywords: Team sports leagues; invariance proposition; competitive balance; revenue sharing; salary cap; salary floor (search for similar items in EconPapers)
JEL-codes: C72 L11 L83 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2009-06
New Economics Papers: this item is included in nep-mic and nep-spo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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