Abstract
Sports leagues in different parts of the world are set up in different ways, some as open leagues and some as closed leagues. It has been shown that spending on players is higher in open leagues (Szymanski and Ross 2000; Szymanski and Valletti Rivista di Politica Economica 95:3–39, 2005). This paper extends these studies, finding that sports leagues that practice promotion and relegation will have unambiguously higher aggregate spending on player talent than closed leagues. This will lower profits in the open league, but increase fan welfare.
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Notes
The quality of facilities can be another, although less significant, factor.
Although data on wage rates is rare, the Annual Review of Football Finance 2009 (Deloitte 2009) provides some anecdotal evidence into wages in English Football. During the 2007/08 season wages on players in the English Premier League increased by £342 million, while that same season the Champion’s League saw an increase of £32 million. The total spending of the English Premier League was £1.2 billion, whereas the total spending in the Champion’s League spending was £291 million. Although this is not 1,027%, the wages in the Champion’s League have been increasing faster than their revenues; “The increase in wages over the last two seasons has been over three times greater than the increase in revenue…” (Deloitte 2009) This leads us to believe this wage rate, for the Champions League, is not sustainable. The Premier League’s increase in player wages has been at the same rate as their revenue increases.
This does not change the expected cost of being relegated, it only changes the expected probability of being relegated. Increasing k increases the probability of relegation, thus the probability of lower expected profits. Teams will increase spending to increase their odds of staying in the higher tiered league.
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Acknowledgements
We would like to thank Skip Sauer, Mike Maloney, Curtis Simon, and Hillary Morgan for helpful comments. Any mistakes are ours.
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Jasina, J., Rotthoff, K. A model of promotion and relegation in league sports. J Econ Finan 36, 303–318 (2012). https://doi.org/10.1007/s12197-009-9120-4
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DOI: https://doi.org/10.1007/s12197-009-9120-4