The Sport League's Dilemma: Competitive Balance Versus Incentives to Win
Tilburg University CentER for Economic Research Working Paper No. 2000-109
36 Pages Posted: 20 Nov 2000
Date Written: November 2000
We analyze a dynamic model of strategic interaction between a professional sport league that organizes a tournament, the teams competing to win it, and the broadcasters paying for the rights to televise it. Teams and broadcasters maximize expected profits, while the league's objective may be either to maximize the demand for the sport or to maximize the teams' joint profits. Demand depends positively on symmetry among teams (competitive balance) and how aggressively teams try to win (incentives to win). Revenue sharing increases competitive balance but decreases incentives to win. Under demand maximization, a performance-based reward scheme (used by European sport leagues) may be optimal. Under joint profit maximization, full revenue sharing (used by many US leagues) is always optimal. These results reflect institutional dierences among European and American sports leagues.
Keywords: Sport league, Revenue sharing, competitive balance, incentives to win
JEL Classification: L9, L83
Suggested Citation: Suggested Citation