OVERINVESTMENT IN TEAM SPORTS LEAGUES: A CONTEST THEORY MODEL

ABSTRACT This paper applies contest theory to provide an integrated framework of a team sports league and analyzes the competitive interaction between clubs. We show that dissipation of the league revenue arises from ‘overinvestment’ in playing talent as a direct consequence of the ruinous competiti...

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Bibliographic Details
Published in:Scottish journal of political economy 2008-07, Vol.55 (3), p.353-368
Main Authors: Dietl, Helmut M., Franck, Egon, Lang, Markus
Format: Article
Language:English
Subjects:
Business investment
Clubs
Economics of sport
Investment analysis
Leisure economics
Paradigms
Sports
Teams
Theories
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Summary:ABSTRACT This paper applies contest theory to provide an integrated framework of a team sports league and analyzes the competitive interaction between clubs. We show that dissipation of the league revenue arises from ‘overinvestment’ in playing talent as a direct consequence of the ruinous competitive interaction between clubs. This overinvestment problem increases if the discriminatory power of the contest function increases, revenue‐sharing decreases, and the size of an additional exogenous prize increases. We further show that clubs invest more when they play in an open league compared with a closed league. Moreover, the overinvestment problem within open leagues increases with the revenue differential between leagues.
ISSN:0036-9292
1467-9485
DOI:10.1111/j.1467-9485.2008.00457.x