Institute for Strategy and Business Economics
University of Zurich
Working Paper Series
ISSN 1660-1157
Working Paper No. 72
The Effect of Salary Caps in Professional Team Sports on Social
Welfare
Helmut Dietl, Markus Lang and Alexander Rathke
January 2008
The Effect of Salary Caps in Professional
Team Sports on Social Welfare∗
Helmut Dietl, Markus Lang, Alexander Rathke **
University of Zurich
Abstract
Increasing financial disparity and spiraling wages in European football have triggered a
debate about the introduction of salary caps. This paper provides a theoretical model of
a team sports leagues and studies the welfare effect of salary caps. It shows that salary
caps will increase competitive balance and decrease overall salary payments within the
league. The resulting effect on social welfare is counter-intuitive and depends on the
preference of fans for aggregate talent and for competitive balance. A salary cap that
binds only for large market clubs will increase social welfare if fans prefer aggregate
talent despite the fact that the salary cap will result in lower aggregate talent. If fans
prefer competitive balance, on the other hand, any binding salary cap will reduce social
welfare.
JEL Classification: C72, D6, L83, M21
Keywords: Salary Caps, Social Welfare, Competitive Balance, Team Sports League
A revised version was published as:
Dietl, H., Lang, M., and Rathke, A. (2009). “The Effect of Salary Caps in
Professional Team Sports on Social Welfare”, The B.E. Journal of
Economic Analysis and Policy, Vol. 9, Article 17.
∗
We would like to thank Martin Bernhard, Egon Franck, Leo Kahane, Stefan Késenne, Wolfgang Köhler,
Marco Runkel, Bernd Schauenberg, Oliver Williamson, UlrichWoitek, conference participants at Magglingen
2007, and seminar participants from the Universities of Antwerp, Freiburg, Munich and Zurich for helpful
comments and suggestions. We also gratefully acknowledge the financial support provided by the Swiss
National Science Foundation (Grant 100012-105270) and the research fund of the University of Zurich.
Responsibility for any errors rests with the authors.
**
All authors from the University of Zurich, Switzerland. Emails: [email protected],
[email protected], [email protected]. Corresponding author: Markus Lang
1
! "
# $ %"#$& ' (
")
"
*+ %"*& , '-./).0 ' 1 )
, " "
2+ $
3
# $ "
# $ "
*+
# $ # $ "
4 $ )$ )
+ 5 1
6
7
$ 5 8 ) 6)'/ 9 : ;
# , , , + ,
/
" ( , , <
= =0 ,
! )+ )+ +
'
%'--. '---&
+ /) 0 "
2+
$ , , % 0&
;
>? % ;& /
@ %'--0 &
0
6
+ 4 %'-0!& " %'-!/&
!
# 8+
% ;& * AB % ;&
, , ,
1 )+
# C
+ %'--0& 1
D
D 5 A , E,
)
+ )
% B
.& * 4)
%'-0!& , + ,
F
%'--;&
, + < ) ,
+
F
%'--;& ,
,
5 F
>? %
& ,) ) )+
, ,
, ,
A , ) )+ ,
1 %& 8 F , )
1 * )
) )+ , , ,
,
1 , )
)+ ,
, ,
, ,
,
8 , ;
; , 1 , / , , #
0 ,
, % & )
8
1 ,
, F , )+ ,
, )+ ,
,+ , 8 F , $ G
,=9 F
1 ,
)) ,
G
5 G
)
1 , . 2 " G
,
* 8
%
& 8 ,
)
8
- 6
)
8
G
9
E #
% /& , 1 G
G
#
% /& , , , G
% B
$ .&
.
@ " G
/
#,
% 8+
;& , G
, ,
%
&'
,
F 1 % & ,
,
,
G
3
,
" , $ G
, %'&
, ,
6
G
G
''
$ , , , # + , , ,+ , 5 ,+ '
8+
% ;& H
+
H +
,
, G
, # + , ,
''
" ,
G
0
,
F ,+ )
%&
,
, %& G
,
,
G
)
, %;&
" I , G , G
#,
>? %
& , ,
8 ,
!
3 %& 8 < ' 8
< ,
) %/&
, $ ,
'; 8 G
, 1 , ! " #
, 1
, + %1
& G
% & %/& '/
'
%0&
# <
%'-9'& >? %
&
, ) '/
F ,
';
9
# %0& ,
, '0 G
, %,+& % & " ,
G
,+ , G
! " " %!&
" " % & %
& 7
G
%0& G
%;& , ,
, $ ! " % #
, 1
,
G
% & %/& , ! ,
%9&
G
,+ E,
'0
# 8 8
, , , )
G
# , )
.
, , 1
F , 8 , 1 , G
2, 1 ,+ #
#
2 ,+ )
G
G
'! G F J , 1
,+ E , DD '9 E ,+
1 1 ,+ G
, , ,+ ,
, G
#
1 " '!
%.&
" G
,+ '9
4 G
-
,
, 8 %-&
, " , 8
,
! ,
%' &
, 8
'. F
$ ! F ! /
& ! " #
, ,+
G
%''&
F ! " G
,
, '.
' %-& %' &
'
'
& " % * , ,
=
( " " " (" , %!& %.& %''& ! , 1
* , , ,
)
=
( (" #
' , %#
'& %#
'& 4 1
#
' , ,
, , )
G
8 , ''-
4 %
& %
& ''
#
'= 51 3 F
& # W
Regime C Regime B
Regime A
W
C
WA
WB
cap’
A
xs
cap
& # W
Regime C
Regime B
Regime A
WC
WA
W
cap’
capBmax
xs
A
B
cap
"= , , 1
,
,
'
G
,
% , & , ,
2, #
' 2 G
8 , ,
, , * ,
%
& )
, 1 )
&
,
,
3
,
1 , * , , * )
) )+ , , , )+ ,
, ,
, ,
, ,
,
" , , #
';
+ A , , , ' ,
,
1 , 2, ,
,
, 1 , ,
'
,
#= ,
,
,
'/
*! " +,- +.- $
F # #
2, , 8
,
! ,
F
2 $ ! ,
,
, 2, , 8
! ! 1 , 8 # ,
# # #
#
(" " ( %'& , %&
%;& ,
, 4
1
%'& * , , =
,
'0
" G
F , 8 , ,
, ! F %'& ! ,
,
! 2
!
, 1
, , , %'& ! , ! %'& , 8 ! F & ! 8 , ,
A & , 8 ! A , 8 %& * , , =
'!
,
F ! %'& , 8 , ,
, ! F =
%& ! , , ! %& 8 , , A " A , , , 8 , 2, , 8
! %;& * , , =
,
" A 1
, G K
%
& 1
,
, ,
'9
#
,
#
' #
= 51 3 F W
Regime C
Regime B
W
Regime A
C
A
W
W
cap’
capBmax
B
A
xs
cap
"= , , 1
,
,
'.
"
* L AB 4 %
;& M !"
# , /9.N0 B
2 #+ 5 $ A %
.& ME
= $ %& # ! ))%;& ;0;N;!.
B
2 $ A % .& M 1 )
,
' ! # / //.N/0-
#
7
# O+
L %
/& M3
%& !& ! (
) .;;N.!
# 4 C
+ L %'--0& M3)
8
)
%& ! )& '!0N'--
>? %
& M $
%& # ! '0 /N/; >? %
& M4 %& $ ! 0!N!0
>? % ;& M )'/ !&
$ * +& ' N'.
" F %'-!/& M = + +&
%& ! 01 'N'/
4 %'-0!& M + %& # !
/' /N0.
7 %'-9'& M = 8 $ %& # ! 0 ''N'/!
7 %'--.& M ' ,-"
' ;N''
'-
7 %'---& 3 L >? M3
7
7
= 5 * 3 5
, *
7 % 0& M + + 8+
%
/) 0 * ) 1 ;N-
;& M %& !
)& ' '';9N''.9
@ L %'--0& M $& !
%& / -9'N-- @ L %
& M $ %& # ! '0 ;!/N;-.
F
L %'--;& M*
+= B
! .& '
N''0