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SALARY CAP REGULATION IN PROFESSIONAL TEAM SPORTS

Authors

  • HELMUT M. DIETL,

    1. Dietl: Professor, Department of Business Administration, University of Zurich, CH-8032 Zurich, Switzerland. Phone +41 44 634 53 11, Fax +41 44 634 53 01, E-mail helmut.dietl@business.uzh.ch
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  • EGON FRANCK,

    1. Franck: Professor, Department of Business Administration, University of Zurich, CH-8032 Zurich, Switzerland. Phone +41 44 634 29 27, Fax +41 44 634 43 48, E-mail egon.franck@business.uzh.ch
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  • MARKUS LANG,

    1. Lang: Senior Research Associate, Department of Business Administration, University of Zurich, CH-8032 Zurich, Switzerland. Phone +41 44 634 53 11, Fax +41 44 634 53 01, E-mail markus.lang@business.uzh.ch
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  • ALEXANDER RATHKE

    1. Rathke: Senior Research Associate, Department of Economics, University of Zurich, CH-8032 Zurich, Switzerland. Phone +41 44 634 52 61, Fax +41 44 634 22 91, E-mail alexander.rathke@econ.uzh.ch
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    • We would like to thank Joan-Ramon Borrell Arque, Joan Calzada, Rodney Fort, Leo Kahane, Stephen Shmanske, Stefan Szymanski, conference participants at Gijon 2008, and seminar participants from California State University (Eastbay), Universitat Pompeu Fabra and University of Barcelona for helpful comments and suggestions on previous versions of this paper. Special credit is due to three anonymous referees and the co-editor Brad Humphreys, who significantly helped to improve the paper. We also gratefully acknowledge the financial support provided by the Swiss National Science Foundation (Grant No. 100014-120503) and the research fund of the University of Zurich (Grant No. 53024501).


Abstract

This paper analyzes the effects of a percentage-of-revenue salary cap in a team sports league with win-maximizing clubs and flexible talent supply. It shows that a percentage-of-revenue cap produces a more balanced league and decreases aggregate salary payments. Taking into account the idiosyncrasies of European football, our paper further highlights the potential conflicts between the league and society. From the perspective of a league governing body, a percentage-of-revenue cap always enhances financial stability of win-maximizing clubs. A social planner, however, will not permit the introduction of such a cap if fans and players unduly suffer. This paper shows under which conditions the social planner accepts (rejects) a salary cap proposed by the league regulator. (JEL D02, D60, L83)

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