The Combined Effect of Salary Restrictions and Revenue Sharing in Sports Leagues

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.

Keywords: Team sports leagues, invariance proposition, competitive balance, revenue sharing, salary cap, salary floor

JEL Classification: C72, L11, L83