Financial Fair Play and Financial
Crises in European Football
Preliminary version of a paper prepared for the 58th panel meeting of Economic Policy,
October 2013
Thomas Peeters
University of Antwerp
Research Foundation Flanders (FWO)
Stefan Szymanski
University of Michigan
Football finance
Revenues and profits in English football, in million £.
Football finance
Wages and wage to turnover ratio in English football, in million £.
Financial Fair Play (FFP)
• Financial regulation:
• part of licensing agreement
• avoid insolvencies
– no negative equity
– no overdues payable
– no auditor qualification
• break-even rule
– football-related income > football-related costs
– prohibits “sugar daddy” financing
Financial Fair Play (FFP)
• UEFA:
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European level
national member associations
represents all stakeholders of European football
organizes inter-league competition:
– Champions League
– Europa League
Regulator + competition organizer
• not horizontal agreement >< salary caps
This presentation
Can breakeven function as a coordination device
and shift rents from players to owners?
– effect on competition in national league:
• impact on wage bills
• impact on revenues
• impact on sports performance
– mimic horizontal coordination (salary cap)
 Simulate FFP for England, Spain, Italy, France
This presentation
Can breakeven function as a coordination device
and shift rents from players to owners?
Our answer: yes.
– wage expenditure declines:
• mildest regime: -€400m
• final regime: -€800m
– revenues remain stable
– top teams consolidate sporting success
Competition Policy and FFP
“I fully support the objectives of UEFA’s Financial Fair-Play rules
[…] The UEFA rules will protect the interests of individual clubs
and players, as well as football sector in Europe as a whole.”*
Joaquin Almunia, European commissioner competition policy
• European Commission:
– joint Statement 21 March 2012
• focus on state aid rules
• model for other sports
• full approval
*Retrieved from: http://www.sportbusiness.com/news/185272/european-commission-endorses-uefa-s-ffp-plans
Competition Policy and FFP
“Specifically, this complaint challenges the restrictions of
competition caused by the “Break-even rule”. […] [It]
generates the following restrictions of competition:
– Restriction of investments
– Fossilization of the existing market structure […]
– Reduction of the number of transfers […]
– Deflatory effect on the level of player’s salaries
– Consequently, a deflatory effect on the revenues of player
agents”
Press release by Jean-Louis Dupont,
lawyer to Daniel Striani, in his complaint to the EC
Outline
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Introduction
Model
Estimation
Counterfactual
Conclusion
Outline
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Introduction
Model
Estimation
Counterfactual
Conclusion
Model
Model
• Club behavior:
– owner sets budget constraint:
• positive: profits flow to owner (e.g. Arsenal)
• negative: owner finances team (e.g. Man City, PSG)
– manager maximizes points given:
• constraint
• productivity
• revenue generating capacity
Model
Contest Function:
• payroll:
• division specific return:
• productivity:
Model
Cobb Douglas revenue function:
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points obtained:
tangible capital stock:
year-division dummy:
team-specific effect:
Profit:
– non-payroll cost:
Model
Optimization problem:
Maximize points
subject to
– owner budget constraint:
 FOC:
 solve for
Model
FFP: increase
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– direct effect:
• affected clubs reduce payroll
– indirect effect:
• winning points cheaper
• revenues teams increase
• payrolls increase
 bounded teams: result indeterminate
 unbounded teams: increase spending
Outline
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Introduction
Model
Estimation
Counterfactual
Conclusion
Estimation
• Data:
– England: 2000-2010, 1st & 2nd division
– Spain: 1998-2011, 1st division
– Italy: 2002-2011, 1st & 2nd division
– France: 2004-2011, 1st & 2nd division
• Variables
– sports: match results, manager tenure
– finance: wages, revenues, assets, profits/losses
Estimation
FOC:
– non-payroll costs: observable
– equilibrium payroll: observable
– budget constraint: observable
– contest success function: estimate
– revenue function: estimate
Estimation
Contest Function:
– unobserved productivity correlated with payroll
 upward bias return parameter
 productivity polynomial (Olley-Pakes)
– manager tenure
– tangible assets
– feedback results to wage spending
 two step estimator Vuong-Rivers (1988)
 two-step ordered probit procedure
Outline
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Introduction
Model
Estimation
Counterfactual
Conclusion
Counterfactual
Replace FOC:
– 4 scenarios:
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= €15m/season
= €10m/season
= €5m/season
= €5m/3 seasons
– Calculate
Counterfactual
• Simulation 2010 EPL season:
1. adjust payroll of affected teams
2. calculate points total and revenues
3. adjust payroll to increase/decrease in revenues
4. recalculate points total and revenues
repeat until fixed point = new equilibrium
• bootstrap procedure using 200 independent
parameter draws
Outline
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Introduction
Model
Estimation
Counterfactual
Conclusion
Conclusion
Breakeven rule:
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rent-shifting mechanism
raises profitability
helps on-field performance top teams
protects UEFA Champions League revenues
Serves interests of consumers?
 Survives antitrust scrutiny?
Thank you for your attention!
Questions and comments more than welcome!