Legal Restrictions on Buyout Fees: Theory and Evidence from German Soccer

Abstract

We perform a theoretical and empirical analysis of the impact of transfer fee regulations onprofessional soccer in Europe. Based on a model on the interaction of moral hazard andheterogeneity, we show (i) how the regulations effect contract durations and wages, (ii) thatcontracting parties have an incentive to agree upon inefficiently long contracts, (iii) how theseincentives vary with the legal system, and (iv) how the relationship between contract durationand performance also depends on the legal system. With one exception, all theoreticalresults are empirically confirmed using a comprehensive data set from the top GermanSoccer League ("Bundesliga").

Keywords: Labor contracts, Bosman judgement, empirical contract theory

JEL Classification: J41, L83