Working Paper Series, Paper No. 08-23 Social Welfare in Sports Leagues with Profit-Maximizing and/or Win-Maximizing Clubs Helmut Dietl†, Markus Lang††, and Stephan Werner††† August 2008, Updated March 2009 Abstract This paper develops a contest model to compare social welfare in homogeneous leagues in which all clubs maximize identical objective functions with mixed leagues in which clubs maximize different objective functions. We show that homogeneous leagues in which all clubs are profit-maximizers dominate all other leagues whereas mixed leagues in which small-market clubs are profit- and large-market clubs are win-maximizers (type-I mixed leagues) are dominated by all other leagues. In addition, we show that, from a welfare perspective, large-market clubs win too often in (purely) win-maximizing and type-I mixed leagues whereas small-market clubs win too many games in (purely) profit-maximizing leagues and in mixed leagues in which large-market clubs are profit- and small-market clubs are win-maximizers (type-II mixed leagues). These results have important policy implications: Social welfare will increase if clubs are reorganized from non-profit members associations to profit-maximizing corporations. Moreover, it is socially desirable to reorganize large-market clubs first because, in mixed leagues, it is better if large-market clubs maximize profits instead of small-market clubs. Finally, we show that the invariance proposition does not hold in any league. In mixed (homogeneous) leagues, revenue sharing decreases (increases) social welfare. Given these results, homogeneous leagues should introduce revenue sharing; mixed leagues should not. JEL Classification Codes: L83, M21, D02 Keywords: Luxury Taxes, social welfare, redistribution, taxation regimes † Institute for Strategy and Business Economics, University of Zurich, Plattenstrasse 14 CH-8032 Zurich, Switzerland, Phone: +41 (0) 44 634 53 11, Fax: +41 (0) 44 634 53 01, [email protected] †† Institute for Strategy and Business Economics, University of Zurich, Plattenstrasse 14 CH-8032 Zurich, Switzerland, Phone: +41 (0) 44 634 53 11, Fax: +41 (0) 44 634 53 01, [email protected] ††† Institute for Strategy and Business Economics, University of Zurich, Plattenstrasse 14 CH-8032 Zurich, Switzerland, Phone: +41 (0) 44 634 53 11, Fax: +41 (0) 44 634 53 01, [email protected] m<m CB 0 TypeI W2 m>m 0 W1TypeII W2WM * PM W2 W2 0.5 PM W1 * WM W1 W1 W2TypeII W1TypeI 1.0 CB W2TypeI WM W2 W1TypeII PM W2 0.5 PM W1 * W1 W2TypeII W1WM W1TypeI 1.0
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