Over-Investment in Team Sports Leagues: A Contest Theory Model

Abstract

This paper applies contest theory to provide an integrated framework of a team sports league and analyzes the competitive interaction between clubs. We show that dissipation of the league revenue arises from over-investment in playing talent as a direct consequence of the ruinous competitive interaction between clubs. This over-investment problem increases if the discriminatory power of the contest function increases, revenue-sharing decreases, and the size of an additional exogenous prize increases. We further show that clubs invest more when they play in an open league compared with a closed league. Moreover, the over-investment problem within open leagues increases with the revenue differential between leagues.