VoxEU Column Competition Policy Industrial organisation

Financial restrictions improve competitive balance in sports

UEFA’s Financial Fair Play regulations, which aim to “introduce more discipline and rationality in club football finances”, have attracted significant criticism, with claims that their effect on competitive balance is uncertain and that they will deprive new clubs of a chance to take off. This column provides a theoretical argument to show that regulations such as salary caps or Financial Fair Play improve investors' incentives to bring money to clubs other than those in the top financial tier, helping to level the playing field.

Sports is an important part of global culture, being a favourite pastime or even an occupation for many. Advances in technology and international outreach, increased coverage through multi-year broadcasts and sponsorship deals, as well as fan loyalty contributing to resilience, have led to the tremendous and consistent growth of major leagues’ revenues, turning them into multi-billion dollar enterprises. According to the Club Licensing Benchmarking Report for the 2016 financial year of the Union of European Football Associations (UEFA), the administrative body for association football in Europe, club revenues have tripled this century, reaching a mark of €18.5 billion in 2016.

The club tournaments with the largest TV audience, the UEFA Champions League and the UEFA Europa League, are held in Europe and administered by UEFA. In addition to multinational corporate sponsors, UEFA receives fees from broadcasters – the latest deal brings in €2.5 billion per year, while the new one for 2018-2021 is expected to contribute a record €3.2 billion per year. UEFA later shares these revenues with participating clubs; according to the official website, “a total of €2.04 billion will be distributed to clubs competing in the 2018/19 UEFA Champions League and the 2018 UEFA Super Cup”. Clubs’ payoffs from participating in such competitions are estimated to be in the tens of millions of euros, which is often a significant share of their total revenues. 

Generous payoffs from participation and progression in UEFA competitions have created incentives for clubs to take on loans to buy new players, betting on immediate success in national and European competitions. In September 2009, UEFA approved the concept of Financial Fair Play (FFP), with its objectives being “to introduce more discipline and rationality in club football finances, … to encourage clubs to compete with(in) their revenues, … and to protect the long-term viability of European club football”. The FFP regulations require clubs entering UEFA competitions to pay off their obligations in a timely manner and live within their revenues (the ‘break-even rule’) by establishing a maximum deficit amount for relevant expenses over relevant income for a monitoring period. These regulations have attracted significant criticism, with claims that the effect of FFP on competitive balance is uncertain and that FFP will freeze the current hierarchy, depriving new leaders of a chance to take off. 

In an early attempt to evaluate the consequences of FFP introduction on the financial health of European clubs, Peeters and Szymanski (2014) simulated the impact of FFP on four of the five largest European leagues under the assumption that the regulations were active in the 2010 and 2011 seasons. They compared the break-even rule with the uniform salary cap and inferred that “conventional salary caps are a superior device to improve competitive balance in national leagues.” Madden (2015) used a framework of a large league with two types of clubs differing in terms of their fan base and “generosity” of investors to conclude that regulations would result in “Pareto dis-improvement for all fans of the league as well as a fall in owner utilities and player wages given relatively elastic talent supply”. Franck and Lang (2014) showed that money injected by owners induced clubs to pursue riskier strategies; consequently, FFP would limit such opportunities. They also noticed that FFP regulations might decrease the bankruptcy risk of football clubs and improve competitive balance. However, neither empirical evidence nor theoretical proof of these claims was presented. In a recent paper (Grabar and Sonin 2018), we provide a theoretical argument to show that FFP will have a positive impact on competitive balance. 

We construct a game-theoretic model to illustrate how the capital structure of a football club is affected by its own and its peers' investment decisions. Naturally, when a club borrows to improve the squad, it implies an increase in the probability of winning for that team and an increase in ticket sales for all teams. On the other hand, debt growth leads to higher interest payments and an increased probability of bankruptcy, which in turn magnifies the expected losses for all teams. Then, we model FFP regulations as a constraint on the amount of debt a club can have. In the new equilibrium, the competitive balance in improves after introducing financial restrictions. Furthermore, regulations such as salary caps or FFP improve investors' incentives to bring money to clubs other than those in the top financial tier, thus further levelling the playing field.

An obvious problem with a full empirical corroboration of our theory is the absence of a ‘control group’ in an experiment that would have established the causal relationship between introduction of the new regulation and the financial outcomes. Still, the improvement in financial disciple in European football since 2011 has been remarkable. By 2018, the FFP regulations have been in place for several years, and UEFA data show a substantial improvement in the financial disciple, both in terms of debt-revenue ratio (Figure 1) and profits (Figure 2). 

Figure 1 Change in operating profits

Note: Figure shows evolution in net debt (billions of euros) and debt-to-revenue ratio.
Source: UEFA Club Licensing Benchmarking reports

Figure 2 Change in debt/revenues

Note: Figure shows aggregated European club’s profits (millions of euros) 
Source: UEFA Club Licensing Benchmarking reports

The UEFA Benchmarking Report covering years up to 2016 says that FFP regulations “have transformed football finances, creating a more stable and sustainable financial position for European top-division clubs”. The highlights of the report state that European clubs generated more than €2.3 billion in operating profits over the last three years, compared with the €0.8 billion in combined losses over the last three unregulated years (2010-2012). Net bottom line losses (equal to operating losses/profits, or “the break-even result,” without adjustments for relevant expenses and income) have been cut by 84% since the introduction of the FFP in 2011. Foreign investors, the majority of whom came from China, set a record in 2016 by taking over nine clubs. In line with our theoretical results, the combined net debt has fallen by almost €1.2 billion in the last seven years and its ratio to revenues has decreased from 65% in 2010 to 35% to 2016.

Authors’ note: Konstantin Sonin is a member of UEFA’s Club Financial Control Body which oversees the implementation of the Financial Fair Play regulations; the views expressed in this contribution are the authors’ own.


Franck, E and M Lang (2014), "A Theoretical Analysis of the Influence of Money Injections on Risk Taking in Football Clubs", Scottish Journal of Political Economy 61(4):1–30, 2014. 

Grabar, V and K Sonin (2018), “Financial Restrictions and Competitive Balance in Sports Leagues”, working paper. 

Madden, P (2015), “Welfare Economics of “Financial Fair Play” in a Sports League With Benefactor Owners”, Journal of Sports Economics 16(2): 159–184. 

Peeters, T and S Szymanski (2014), “Financial fair play in European football”, Economic Policy 29(78): 343–390. 

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