Contracts as Rent Seeking Devices: Evidence from German Soccer

35 Pages Posted: 25 Nov 2008

See all articles by Eberhard Feess

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH

Michael Gerfin

University of Bern; IZA Institute of Labor Economics

Gerd Muehlheusser

University of Hamburg; IZA Institute of Labor Economics

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Abstract

Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German "Bundesliga", our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency.

Keywords: strategic contracting, rent seeking, empirical contract theory, long-term contracts, breach of contract, sports economics

JEL Classification: L14, J63, L40, L83

Suggested Citation

Feess, Eberhard and Gerfin, Michael and Muehlheusser, Gerd, Contracts as Rent Seeking Devices: Evidence from German Soccer. IZA Discussion Paper No. 3834. Available at SSRN: https://ssrn.com/abstract=1305818 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Eberhard Feess (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Michael Gerfin

University of Bern ( email )

CH-3012 Bern
Switzerland
+41 31 631 4092 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gerd Muehlheusser

University of Hamburg ( email )

Von Melle Park 5
Hamburg, 20146
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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