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

See all articles by Frederic Palomino

Frederic Palomino

Centre for Economic Policy Research (CEPR)

Luca Rigotti

University of Pittsburgh - Department of Economics

Date Written: November 2000

Abstract

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

Palomino, Frederic Albert and Rigotti, Luca, The Sport League's Dilemma: Competitive Balance Versus Incentives to Win (November 2000). Tilburg University CentER for Economic Research Working Paper No. 2000-109. Available at SSRN: https://ssrn.com/abstract=250793 or http://dx.doi.org/10.2139/ssrn.250793

Frederic Albert Palomino (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luca Rigotti

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

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