Contracts as Rent Seeking Devices: Evidence from German Soccer

Eberhard Feess (eberhard.feess@vuw.ac.nz), Michael Gerfin (michael.gerfin@vwi.unibe.ch) and Gerd Muehlheusser (gerd.muehlheusser@uni-hamburg.de)
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Michael Gerfin: University of Bern
Gerd Muehlheusser: University of Hamburg

No 3834, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German "Bundesliga", our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency.

Keywords: breach of contract; strategic contracting; rent seeking; empirical contract theory; sports economics; long-term contracts (search for similar items in EconPapers)
JEL-codes: J63 L14 L40 L83 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008-11
New Economics Papers: this item is included in nep-cta and nep-spo
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Published - published in: Economic Inquiry, 2015, 53(1), 714-730

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Related works:
Journal Article: CONTRACTS AS RENT‐SEEKING DEVICES: EVIDENCE FROM GERMAN SOCCER (2015)
Working Paper: Contracts as Rent-Seeking Devices: Evidence from German Soccer (2010)
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