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

Egon Franck and Markus Lang

No 160, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)

Abstract: 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.

Keywords: Regulation; sports; UEFA; risk; bailout (search for similar items in EconPapers)
JEL-codes: C72 D43 D72 L13 L83 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-03
New Economics Papers: this item is included in nep-spo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: A Theoretical Analysis of the Influence of Money Injections on Risk Taking in Football Clubs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:iso:wpaper:0160

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