Salary Cap Regulation in Professional Team Sports

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) * We would like to thank Joan-Ramon Borrell Arque,

How professional sports clubs exploit a heterogeneous local potential: the case of Swiss professional ice hockey

“…The North American system of an absolute capped salary amount for all clubs covered by the CBA would probably be difficult to implement in the highly heterogeneous SNL. As a consequence, the only workable solution in the Swiss context seems to be a percentage-of-revenue cap (cf., Dietl et al 2012).…”

Player Salaries and Revenues in the Australian Football League 2001–2009: Theory and Evidence

“…Thus, if the Dietl, Lang and Rathke (2011) results generalise to a win-maximising setting, their analysis supports the finding that the increasing share of club revenues being derived from revenue sharing via the AFL would be associated with a declining share of player payments. Dietl, Franck, Lang and Rathke (2011) explore the impact of a percentage of club revenue salary cap in a league where the clubs behave as win maximisers. Their analysis is in the setting of European football (soccer) in which the clubs in different countries have vastly different revenue potentials.…”

“…In the setting of win-maximising clubs that characterise European football (soccer) salary caps produce greater financial viability for clubs as the modelling of Dietl, Franck, Lang and Rathke (2011) links salary caps to club revenue and reduce the incentive for win-maximising clubs to spend all of their revenue while still producing an incentive to increase revenues. In the AFL setting the scenario is different as the club level salary caps are set by the league and the players' association and do not bear as strong a relationship to club revenues.…”

International Sports League Comparisons

“…As Dietl et al (2011a) Representing all stakeholder groups of a particular sport, sports associations perform regulatory functions normally reserved to the state. Because the scope for autonomous regulatory activity by the sports governing bodies is limited by national and EU law, it is a priori unclear whether a particular payroll cap mechanism in Europe falls under the margin of discretion granted to the associations by the European Union.…”