Salary Cap Regulation in Professional Team Sports

By Dietl, Helmut M.; Franck, Egon et al. | Contemporary Economic Policy, July 2012 | Go to article overview

Salary Cap Regulation in Professional Team Sports


Dietl, Helmut M., Franck, Egon, Lang, Markus, Rathke, Alexander, Contemporary Economic Policy


I. INTRODUCTION

Competitive imbalance leading to boring games and the ruinous escalation of player salaries play the dominant role among the dangers cited in all attempts to regulate professional team sports since the introduction of the first professional leagues in the United States. Throughout their history, American professional team sports have employed a wide array of regulations against these dangers. Reserve clauses limiting free agency of players were the most prominent example in this context. (1) The reserve clause dissolved in the 1970s because of the activities of players' unions and antitrust threats. The latest state of development in this struggle for cost controls and the promotion of competitive balance is known under the heading of salary caps.

A salary cap limits the total amount of salaries paid by a club to all its players. All four North American major team sports leagues have introduced some variant of a salary cap mechanism in the meantime. (2) In contrast to earlier regulations imposed by the team owners on players, salary caps are now an integral part of the system of labor relations in the league. The maximum (and sometimes minimum) amount of league revenues which should be devoted to player salaries is negotiated between the players' unions and the team owners and is fixed in Collective Bargaining Agreements (CBAs). Therefore, salary caps are not subject to antitrust actions as earlier regulations affecting the player market used to be.

Although in the last decade European club football has achieved an economic and financial potential comparable to that of the North American major leagues, it has not yet followed those leagues' example of introducing salary cap mechanisms. Presumably, this reluctance is not caused by the dangers of competitive imbalance and financial instability being unknown among the stakeholders of European football. Rather, the opposite seems to be the case. The recently published Independent European Sports Review (Arnaut 2006), an expert report based on a process of intensive consultation with the most important stakeholder groups of European football, leaves no doubt that the general perception is that competitive balance in European club football is declining and that a large number of clubs have stumbled into a massive financial crisis and are accumulating ever-increasing debt. The reasons for the past inactivity of European club football to introduce salary cap mechanisms are structural, as outlined in the next section.

The sports economics literature concerning the influence of salary caps in professional team sports leagues is mainly focused on the impact on competitive balance and club profits. Staudohar (1998) gives a historical overview of the development of salary caps in the North American major leagues. Quirk and Fort (1992) suggest that salary caps may improve competitive balance because they prevent large-market clubs from bidding the full marginal value for additional talent. This effect allows small-market clubs to keep their star players. Fort and Quirk (1995) consider an enforceable salary cap as the only effective device to maintain financial viability and improve competitive balance. Their theoretical model predicts a decrease in the standard deviation of win percentage. Vrooman (1995, 2000) argues that salary caps are a collusive effort by clubs to maximize league revenues by controlling labor costs at the expense of less competitive balance within the league. Kesenne (2000) develops a two-team model consisting of a large- and a small-market club and shows that a National Basketball Association (NBA) type of salary cap, defined as a fixed percentage of total league revenues in the previous season divided by the number of teams, will improve competitive balance as well as the distribution of player salaries within the league. Moreover, he shows that the profits of both the small- and the large-market club will increase. …

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