DP13154 Financial Restrictions and Competitive Balance in Sports Leagues

Author(s): Vsevolod Grabar, Konstantin Sonin
Publication Date: September 2018
Keyword(s): financial regulation, competitive balance, financial regulation, investment tournaments, UEFA Financial Fair Play
JEL(s): C72, D63, G28
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13154

A dramatic surge in revenues from TV broadcasting and brand-selling forced modern football clubs, simultaneously involved in domestic and European competitions, to operate in a new environment. In response, the Union of European Football Associations introduced the Financial Fair Play Regulations, a set of financial regulations that affect all major European clubs. To assess the impact of financial restrictions (e.g., salary caps) on the default risk for individual clubs and competitive balance, we construct a game-theoretic model where clubs make decisions on the amounts they borrow and spend on the team. The impact of financial restrictions on competitive balance is positive; the total amount of debt also decreases at equilibrium. Finally, we show that financial restrictions create more incentives to invest in second-tier clubs compared to the situation in which there are no financial regulations.