Salary Cap Regulation in Professional Team Sports

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.

Keywords: Competitive balance, regulation, salary cap, social welfare, team sports leagues

JEL Classification: D02, D60, L83

Suggested Citation: Suggested Citation

Dietl, Helmut M. and Franck, Egon P. and Lang, Markus and Rathke, Alexander, Salary Cap Regulation in Professional Team Sports (November 15, 2010). Contemporary Economic Policy, Forthcoming, University of Zurich - Institute for Strategy and Business Economics - Working Paper No. 86, Available at SSRN: https://ssrn.com/abstract=1156004