Discussion paper

DP13154 Financial Restrictions and Competitive Balance in Sports Leagues

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.

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Citation

Sonin, K and V Grabar (2018), ‘DP13154 Financial Restrictions and Competitive Balance in Sports Leagues‘, CEPR Discussion Paper No. 13154. CEPR Press, Paris & London. https://cepr.org/publications/dp13154