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The effect of salary caps in professional team sports on social welfare


Dietl, H; Lang, M; Rathke, A (2009). The effect of salary caps in professional team sports on social welfare. B.E. Journal of Economic Analysis & Policy, 9(1):129-151.

Abstract

Increasing financial disparity and spiralling wages in European football have triggered a debate about the introduction of salary caps. This paper provides a theoretical model of a team sports leagues and studies the welfare effect of salary caps. It shows that salary caps will increase competitive balance and decrease overall salary payments within the league. The resulting effect on social welfare is counter-intuitive and depends on the preference of fans for aggregate talent and for competitive balance. A salary cap that binds only for large market clubs will increase social welfare if fans prefer aggregate talent despite the fact that the salary cap will result in lower aggregate talent. If fans prefer competitive balance, on the other hand, any binding salary cap will reduce social welfare.

Abstract

Increasing financial disparity and spiralling wages in European football have triggered a debate about the introduction of salary caps. This paper provides a theoretical model of a team sports leagues and studies the welfare effect of salary caps. It shows that salary caps will increase competitive balance and decrease overall salary payments within the league. The resulting effect on social welfare is counter-intuitive and depends on the preference of fans for aggregate talent and for competitive balance. A salary cap that binds only for large market clubs will increase social welfare if fans prefer aggregate talent despite the fact that the salary cap will result in lower aggregate talent. If fans prefer competitive balance, on the other hand, any binding salary cap will reduce social welfare.

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3 citations in Web of Science®
12 citations in Scopus®
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348 downloads since deposited on 04 May 2009
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:13 April 2009
Deposited On:04 May 2009 09:20
Last Modified:05 Apr 2016 12:50
Publisher:Berkeley Electronic Press
ISSN:1935-1682
Additional Information:The Berkeley Electronic Press © 2009
Publisher DOI:https://doi.org/10.2202/1935-1682.2034
Official URL:http://www.bepress.com/cgi/viewcontent.cgi?article=2034&context=bejeap

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