THE COMBINED EFFECT OF SALARY RESTRICTIONS AND REVENUE SHARING IN SPORTS LEAGUES

Authors

  • HELMUT M. DIETL,

    1. Dietl: Professor, Institute for Strategy and Business Economics, University of Zurich, Plattenstrasse 14, 8032 Zurich, Switzerland. Phone +41-44-6345311, Fax +41-44-6345329, E-mail helmut.dietl@isu.uzh.ch
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  • MARKUS LANG,

    1. Lang: Research Associate, Institute for Strategy and Business Economics, University of Zurich, Plattenstrasse 14, 8032 Zurich, Switzerland. Phone +41-44-6345311, Fax +41-44-6345329, E-mail markus.lang@isu.uzh.ch
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  • ALEXANDER RATHKE

    1. Rathke: Research Associate, Institute for Empirical Research in Economics, University of Zurich, Winterthurerstrasse 30, 8006 Zurich, Switzerland. Phone +41-44-6343569, Fax +41-446343599, E-mail rathke@iew.uzh.ch
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    • Previous versions of this article were presented at the 84th Annual Conference of the WEAI in Vancouver 2009, the Football and Finance Conference 2009 in Paderborn, the First European Conference in Sports Economics 2009 in Paris, and the Young Researchers Workshop on Contests and Tournaments 2009 in Magdeburg. We wish to acknowledge useful comments and suggestions on a previous draft by two anonymous referees and the co-editor Lawrence Kahn. We further would like to thank Dennis Coates, Egon Franck, Bernd Frick, Roger Hartley, Brad Humphreys, Stefan Késenne, Paul Madden, Gerd Muehlheusser, Marco Runkel, and Stefan Szymanski. Financial support was provided by the Swiss National Science Foundation (Grant Nos. 100012-105270 and 100014-120503) and the research fund of the University of Zurich. Responsibility for any errors rests with the authors.


Abstract

Many major sports leagues are characterized by a combination of cross-subsidization mechanisms like revenue-sharing arrangements and payroll restrictions. Up to now, the effects of these policy tools have only been analyzed separately. This article provides a theoretical model of a team sports league and analyzes the combined effect of salary restrictions (caps and floors) and revenue sharing. It shows that the effect on club profits, player salaries, and competitive balance crucially depends on the mix of these policy tools. Moreover, the invariance proposition does not hold even under Walrasian-conjectures if revenue sharing is combined with a salary cap or floor. (JEL L83, C72, L11)

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