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Are Voluntary Salary Cap Agreements Self-Enforcing?

Author

Listed:
  • Helmut Dietl
  • Egon Franck
  • Stephan Nüesch

    (Institute for Strategy and Business Economics, University of Zurich
    Institute for Strategy and Business Economics, University of Zurich
    Institute for Strategy and Business Economics, University of Zurich)

Abstract

In 2002 the leading European football clubs reacted to the increasing player salaries by signing a voluntary agreement to limit player salaries to 70% of revenues. We analyze under which conditions a voluntary salary cap agreement is self-enforcing. Based on a simple model of a league with two profit-maximizing clubs, we show that the self-enforcing character of salary caps increases with the clubs’ valuation of future profits and the importance of competitive balance. In European football leagues salary cap agreements are not likely to be self-enforcing because (1) promotion and relegation as well as limited transfer windows reduce the clubs’ discount factor and (2) competitive balance is less important in order to activate fan interest than in US Major Leagues.

Suggested Citation

  • Helmut Dietl & Egon Franck & Stephan Nüesch, 2005. "Are Voluntary Salary Cap Agreements Self-Enforcing?," Working Papers 0003, University of Zurich, Center for Research in Sports Administration (CRSA).
    • Handle: RePEc:rsd:wpaper:0003
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    Cited by:

    1. Büch, Martin-Peter & Maennig, Wolfgang & Schulke, Hans-Jürgen (ed.), 2012. "Sport und Sportgroßveranstaltungen in Europa - zwischen Zentralstaat und Regionen," Edition HWWI, Hamburg Institute of International Economics (HWWI), volume 4, number 4.
    2. Dietl Helmut M & Duschl Tobias & Lang Markus, 2011. "Executive Pay Regulation: What Regulators, Shareholders, and Managers Can Learn from Major Sports Leagues," Business and Politics, De Gruyter, vol. 13(2), pages 1-32, August.
    3. Stephen Morrow, 2014. "Football finances," Chapters, in: John Goddard & Peter Sloane (ed.), Handbook on the Economics of Professional Football, chapter 6, pages 80-99, Edward Elgar Publishing.
    4. Helmut Dietl & Tobias Duschl & Markus Lang, 2010. "Gehaltsobergrenzen und Luxussteuern: Erkenntnisse aus dem professionellen Mannschaftssport," Working Papers 0039, University of Zurich, Center for Research in Sports Administration (CRSA).
    5. Dietl, Helmut & Duschl, Tobias, 2012. "The organization of professional sports leagues: A comparison of European and North-American leagues from the perspective of platform organization," Edition HWWI: Chapters, in: Büch, Martin-Peter & Maennig, Wolfgang & Schulke, Hans-Jürgen (ed.), Sport und Sportgroßveranstaltungen in Europa - zwischen Zentralstaat und Regionen, volume 4, pages 111-126, Hamburg Institute of International Economics (HWWI).
    6. Helmut Dietl & Egon FrancK & Markus Lang & Alexander Rathke, 2008. "Welfare Effects of Salary Caps in Sports Leagues with Win-Maximizing Clubs," Working Papers 0825, International Association of Sports Economists;North American Association of Sports Economists.

    More about this item

    Keywords

    salary caps; sport leagues; self-enforcing contracts;
    All these keywords.

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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