Samenvatting verplichte stof

Deze samenvatting is gebaseerd op het studiejaar 2013-2014.

Chapter A - Economics of sport

Professional sports can be viewed as an economic process. Factors of production (input) as labor (manager/coach and athletes) are combined with capital (sporting field, equipment) to produce, along with another team in the league, a product (the fixture) that is sold to consumers (supporters and spectators). Further, participating or volunteering in sports activities costs time.

A sports league can be viewed as an industry in which every actor’s (fans, sport clubs) actions cannot affect the industry-level activity as a whole, this is perfect competition. The size of actors is to small compared to the total number of actors. There is also free entry and exit and it is assumed that the product (a sports fixture) is identical to all other products: homogeneous. Clubs are price takers, they cannot influence prices. Resource markets (labor markets) are assumed to be perfect competitions as well, so to clubs wage rates and other resource markets are fixed.

The figure 1.1 on page 6 shows a diagrammatic representation of the league. On the left-hand side is a representation of the costs and revenues facing an individual club within the league and on the right-hand side is a representation of the demand and supply of the league’s fixtures and sport fixtures.






Average revenue



Marginal revenue

q and Q


Number of fixtures

Marginal costs are the costs (fixed) incurred from producing an extra item of output. The MC curve is essential to understanding how much output competitive firms, and hence the market, supply. AC refers to both fixed and variable costs and therefore describes the full, total cost per fixture. When MC is less than AC, AC falls. When MC is greater than AC, AC rises. At MR = MC, zero economic profit is earned.

The rise or fall In ticket prices, will in the absence of changes in other factors, reduce or increase the demand for sports matches. The inverse relationship implied by the curve of demand is often referred to as the law of demand.

The maximal contribution to the firm’s profit occurs where MC is equal to price or MR. If the firm were to increase its output beyond q, then the added cost MC exceeds the revenue received from the additional sale at market price p. If the firm reduced its fixtures below q, then contribution to profit is missed, as P=MR>MC, which implies that profits are not maximized. MC can only rise for a given wage rate when the marginal product falls. If the wage rate for a player is €10 per fixture, but the player only plays half a match, the marginal costs are €20.

Price = wage rate of players / marginal product of players

Wage rate of players = price x marginal product of players

Wage rate of players = marginal revenue product of players

Law of diminishing marginal productivity: if clubs put in more fixtures, they will have to make use of less productive players to perform in these fixtures, because the most productive players are already being used.

Production efficiency: generating the maximum numbers of fixtures from the minimum amount of resources (land, labor and capital).

Market failures

Market failures stand in counterpoint of perfect competition and suggest more realism to the model. Market failures form reasons for policy makers to intervene in the market, for instance by taxing, subsidizing. Examples of market failures are:

  1. Monopoly

  2. Equity

  3. Externalities

  4. Public goods

  5. Imperfect information

1. Monopoly

A monopoly is when only one firm supplies the market (for instance a league). There is only one supplier, who is the price setter or price maker. Because of this, P=AR=MR no longer holds. The MR curve is twice as steep as the AR curve, as shown in figure 1.3 on page 16. Monopoly supply of sports fixtures. MR will be less than AR for a monopoly and any other form of market where firms can influence the market price.

Profit maximizing output is found when MC = MR, so at Q*. Market demand is now represented by the monopolist’s AR curve, so the price set by the monopolist is found at P*. Nevertheless, in this situation productive efficiency is not maximized, because the number of fixtures produces does not reflect lowest average cost. A monopolist can make substantial extra profits by restricting output.

An important implication of monopoly supply is that even in the longer run, because of the lack of competition and inability of clubs to enter the league or rival leagues to be set up to supply the sport, supernormal profits can be earned. This is because, on each ticket sold, there is a mark-up above average costs of P* - AC*. This suggest that the number of tickets sold will always be less than would have been the case under a perfectly competitive league.This is shown in figure 1.4 on page 16 Monopoly vs. perfect competition, where Q* and P* are the profit maximizing price and number of fixtures in a monopoly situation and Qc and Pc are the profit maximizing price and number of fixtures in a perfect competition league. The welfare cost of having a monopoly league is greater than that of having a perfect competition league, since in monopoly price is higher while output is lower, compared to perfect competition. This welfare loss is given by a deadweight loss triangle wxy and wyz. Triangle wxy is the lost consumer surplus, the amount that consumers are willing to pay for a ticket above what they have to pay in a competitive market. Triangle wyz is the los producer surplus, it presents how much value is lost to consumers as a result of not having up to Qc numbers of tickets to purchase at a price of Pc, and which are valued more highly than Pc.

2. Equity

The model of perfect competition and economic efficiency does not recognize issues of the inequitable distribution of resources and the fact that hose with higher incomes can demand more goods than others.

Equity can be both understood and addressed in policy, through vertical means, namely the unequal treatment of unequal’s, (lower price for students, but a premium price for executive boxes) or horizontally, through he ‘equal treatment of equals’ (all students pay the same ticket price). A policy dilemma only arises if all seats in a stadium could be sold at the executive price.

Equity affects in:

  • Participation sport (subsidized facilities)

  • Professional team sports (differentiated ticket prices)

  • Mega events (should all tax payers contribute)

3. Externalities

Externalities can arise when property rights are not clearly defined, markets can fail to produce an efficient allocation of resources. This can mean that the private benefits and costs received by or paid to a consumer or a supplier does not correspond to those of society.

Negative externalities: Market oversupplies the amount of sport, private benefits of consumption exceed the social benefits or the social costs of production are greater than the private benefits. For instance: armchair mountaineering and fans turning into hooligans.

Positive externalities: Market undersupplies the amount of sport, social benefits of consumption exceed those of individual, or the social costs of production are less than the private costs of production. For instance: successful sports team raises the morale of fans and club members, increasing their productivity.

4. Public goods

Public goods are both non-rival and non-exclusive. This makes it a market failure/imperfection. Non-rival means that resources are not totally scarce, for instance a stadium may be only half full, which means that if one more fan came to the match, the cost of providing the match would still be the same: MC = 0. Non-exclusive means that customers cannot be prevented from consuming the good.

5. Imperfect information

Imperfect information consists of different aspects:

  • Information asymmetry: one person has more information than others, which can lead to moral hazard problems.

  • Adverse selection (screening)

  • Incapability to optimize (tournaments, contract design)

Limitations to policy maker intervention

There are two main limitations: (1) The Coase theorem and (2) government failure.

Coase theorem: When an externality affects few parties and if property rights are well-specified, economics efficiency can arise from the market through bargaining. Thus, gains from trade by internalizing the externality force a solution through the emergence of market trade.

Government failure consist of:

  • Limited flexibility of the government

  • Regulatory capture: Policy makers begin to pursue their own interests instead of those of the society

  • Taxes and subsidies distort resource allocation and may impose their own externalities on society.

Functional relationship

A specific form of functional relationship can be written as: Y = β1 + β2 X2 + β3 X3 + … + βk Xk in which Y is the dependent variable, X2, X3 and Xk are independent variables whose value an change, and β1, β2, β3 and βk are parameters with a fixed value.

Chapter B - Nature, organization and economic significance of sport

The 1992 European Sports Charter argues that: “Sport embraces much more than traditional team games and competition. Sport means all forms of physical activity which, through casual or organized participation, aim at expressing or improving physical fitness and mental well-being, forming social relationships or obtaining results in competition at all levels”. In practice, sport does not have a predetermined definition. One should always bear in mind the context in which the terms sport, recreation, leisure and physical activity are used.

Economic organization

Demand for sport creates related derived demands, for instance demand for equipment, facilities and clothing. Derived demands express how interrelated economic activity is.

Sport domains: Segment:

  1. Professional team sports Professional team sports

  2. Events Sports events

  3. Formal participation (clubs) Mass sports participation

  4. Informal participation Mass sports participation

The number of participants is the highest in informal participation and the lowest in professional team sports. Domains 1 and 2 grow out of domains 3 and 4. The sports domains together are called the sports policy body, while 1, 2 and 3 together are governing bodies.

Environmental evidence on sport environment

Sports are part of a set of interrelated markets. All of this economic activity takes place within a regulatory framework, what exists more clearly in Europe than in the US. In sports there are three main tiers to this framework:

  1. Public policy of national and supra-national policy-making agencies (EU rulings are on supra-national level, Ministries of Sport are on national level) Main focus on football and gets a lot of media attention.

  2. Sport policy bodies (Sport councils, committees: NOC*NSF, UK Sport, Sport England etc.) – lying below central government agencies, most countries have sports policy bodies which act as vehicles for delivering central and local government initiatives or allocation finances to sport.

  3. Governing bodies and professional team sports (Leagues, associations, clubs, which all help to manage formal sports participation: KNVB, UEFA, FIFA). Rules are endogenous.

Recent rulings on sport by the European Commission concern amongst other media rights for the Champions league, football players’ agent, Formula 1 regulations. However, European rulings on sport have been issued since decades, for example the 1974 Walgrave ruling, which established sport as an economic activity and made it subject to the Treaty of Rome.

Events and mass participation

An event is connected with a less-regular sports competition, in both the frequency of competition and the location in which it take place; compared to a league, like Olympic Games and World Cup Soccer.

Mass participation occurs in part through formal participation in for instance clubs, in part by individual, informal participation. Care should be taken not to treat this sector as homogenous.

Changes in sport policy

Historic changes in sports policy are:

  • Sports policies and public funds are used more and more for professional and elite than for mass participation activities

  • Scale of economic activity with elite sports at events has increased significantly

  • Costs of organizing major events have risen significantly

  • Internationalization, globalization and commercialization of sports

  • Increased spill-over effects to related industries.

Sport looms large in people’s minds, in economics terms it is still a small proportion of overall economic activity, at least as measured.

Chapter C - The professional sports market

People consume sports activities by participating in sports. The consumption-production function includes people that help to produce sport activities by paying membership fees, donations etc. which are used to supply the sport activities. Consumer-producers pay fees and act as volunteer to fund supply in sports in which they participate, small scale, heterogeneous products. The role of public policy in professional sports is: supply, equity, and efficiency.

A sports club (as an entity) cannot supply the sport by itself. To do this, it need the cooperation of both individuals (consumer-producers) and other sports clubs. In amateur sports participants can be viewed as consumer-producers, because they combine voluntary time plus membership fees and other donations and expenses to fund the supply of the sports activity in which they typically participate. Other sports clubs are needed in order for a competition or contest to be organized. Therefore, a sports contest requires the clubs resources (land, capital) and the efforts of other clubs. The contest equations below describes the production of output from the use of inputs. Equation 1 recognized that a sports contest within a club (subscript ‘wc’) requires the club’s land and capital and the effort of two competitor members, A and B.

  1. Contestwc = Contestwc (Land, Capital, CompetitorA, CompetitorB)

Equation 2 shows that in a sports contest between clubs 1 and 2 with subscript ‘12’ signifying that club 1 is the home club and club 2 is the away club that competition emerges from the use of the labor efforts of competitors from each club, c1 and c2 respectively, and the land and capital of one of the clubs, in this case c1.

  1. Contest12 = Contest12 (Landc1, Capitalc1, Competitorc1, Competitorc2)

The nature of a sports competition requires a balance between competition and cooperation between contestants.


The professional sports sector emerged from the informal sector, through a process of formalization. This formalization regards the rules of the game, the organization of leagues, events etc. and the definition of the ‘product’ which is supplied. In economic terms this meant that the product needed to be defined and made sufficiently homogenous so that (a potential) large-scale demand could develop and supply become organized to meet it. In many occasions, this formalization was conducted via the emergence of (national) sports associations like the FA in England.

Formalization of sports started already in the 19th century, for example with the emergence of the National Association of Baseball Players (NABBP) in the US in 1858, the Football Association (FA) in England in 1863 and the Rugby Football Union (RFU) in 1871.

The perspective of the NABBP can be eroded by three subsequent and interrelated developments, which stimulated the start of professionalism:

  1. Develop of organized competition

  2. Commercial gains from paying spectators enabled clubs to pay players and attract the best talent

  3. Formation of leagues in which professional players are paid, requiring clubs to extract more regular gate money and utilize facilities more fully.

The Baseball leagues in the US end 19th century:

  • Are owned by team players

  • Players bound to contract

  • Are closed leagues, territorial monopoly

  • Are for profit

  • Player reserve system

The oldest professional sport is played by the Gladiators (Rome) for money and freedom. The entrance was usually free, there was a political patronage the athletes where highly specialized and it were valuable assets.

The difference between voluntary and emergent professional sports are:


Voluntary sports

Professional sports



Club: members

Sport: governing body

US: team owners

Europe: team owners and governing body

Club objectives


US: profit

Europe: success & financial survival


Consumer-producer members

Gate paying spectators


Consumer-producer members

Professional athletes

Professional management

Europe: non-remunerated directors

Form of competition

Cup competitions

Traditional fixtures

Ad-hoc tournaments

Cup competitions

League fixtures

Table 1 Differences between voluntary and emergent professional sports

Tournament theory or contest theory has its roots in the work of Tullock in the 1980s, which explored rent-seeking behavior by contestants for public funds. Contest theory: more value in small leagues. Rent-seeking behavior refers to the activities of economic agents extracting a return as a factor of production that is not directly connected with their productivity, but is more a reflection of their control over resources as a result of regulation or other constrains on mutually beneficial exchange, as defined in the theory of competitive markets. Monopoly power can be viewed as rent seeking.

Tournament theory means that tournament participants and organizers work together in the production of the event. The goal for the participant is obviously to win the tournament. The goal for the organizer is to get an economic/financial return from organizing the activity. The organizer can be seen as the ‘principal’ who employs ‘agents’ (participants).

For the quality high quality of the tournament, the organizer should try to ensure that all participants are equal to each other, so they have to punt in the same amount of effort to win. Rewards to the participants should be predetermined by the organizer and increase with rank.

Tournaments are concerned with economic activity whose output is assessed in relative rather than absolute terms. Examples of absolute yardsticks are world records for the times of various races, distances of various throwing events, heights and distances of various jumping events of weights lifted.

Typical forms of tournaments in sports are:


competition form




Champions taken on by the right to challenge, based in other tournaments


Multi-stage tournaments

Contestants meet initially in groups then either progress to

(1) elimination tournament

(2) Further robin tournament

(3) Match play golf

World Cup, Champion League, World Series

Round robin tournament

All contestants meet an equal number of time

Football League (Eredivisie, Bundesliga, Premieship)

Table 2A Typical forms of tournaments in sports.


competition form



Double elimination


Same as single elimination knockout tournament, only best loser get another chance to compete

Athletic, Rowing

Single elimination knockout tournament

Hierarchical series of rounds of competitions between contestants, with the op ranked in each case only progressing

Tennis Grand Slam (Wimbledon)

Single rank order tournament

Individuals/teams meet for a single specific contest

Marathon running

Table 2B Typical forms of tournaments in sports

The probability of success for a participant depends on the own effort and the effort put in by the competitor(s). Thus, success depends on effort:

S1 = Π1γ



Success in a competition



Effort of participants



Tournament design and ability of tournament to distinguish between the participant’s effort/talent and sheer luck.

The equitation’s are written in Cobb-Douglas form, because it is recognized that the productivity of the effort is captured in the exponential parameter γ. γ can be viewed as reflecting the tournament’s design and consequently its ability to convert the competitor’s effect into success.

The probability of success: If for example there is a contest between two participants, the probability that participant 1 wins is:

P = Probability of success, Π = effort of participants, γ = tournament design and ability of tournament to distinguish between the participant’s effort/talent and sheer luck. If γ = 0, there is no discrimination, the tournament (organizer) has no influence on the success of individual participants and the tournament becomes a pure lottery, the winning probabilities is 0,5 (P1 = P2 = 0,5). If γ = ∞, the competitor with the most effort wins with certainty (P11). Increases in the value of γ impair (improve) the success probabilities of lower (higher) effort teams.

There are two potential reasons why complete (un)certainty could lead to market failure for a tournament:

  1. If participants viewed their effort as not having an impact on tournament outcome, they would not participate, or only with minimal effort.

  2. When a participant realizes that another contestant has a disproportionately greater prospect of winning the contest, then effort in the tournament would fall. The tournament would fail because of declining quality, caused by moral hazard.

Moral hazard: no effort if others are too good.

The solution to the contest can be identified as a Nash equilibrium: requires specifying the payoff to each contestant, recognizing the efforts of the other contestants and then finding the optimal effort levels of each contestant, given the efforts of the other contestants.

The payoff to a contestant is equal to the probability of winning minus the marginal cost of effort: R1 = P1V – c1 Π1






Value of the win (first prize)



Marginal cost of the effort

With ‘n’ contestants, a Nash equilibrium level can be found following the formula:

This equation summarizes a number of important interrelated features about tournaments that can help to understand the economics of sports. Increasing in value and winning probability, then decreasing in cost and effort. Π = effort of participants, V = value of the win (first prize), γ = tournament design and ability of tournament to distinguish between the participant’s effort/talent and sheer luck, c = marginal cost of the effort , n = number of contestants.


We assume that quality of a tournament rises with effort Q = Q(Πe), Q!e) > 0

The quality of a tournament depends on the value of this equilibrium effort. Concluded can be:

  • The fewer contestants, the more effort they will put in, raising the value of the contest and the attractiveness to spectators (quality). Explains why US has small, closed leagues.

  • Average effort is increasing in total purse V. The greater the value of V, the more effort will be put In by competitors.

  • Average effort is decreasing in marginal cost c. if the marginal cost of effort rises (if putting in more effort does not increase the chance of winning), the level of effort and the quality of the contest will fall.

  • The greater γ, the greater average effort. (The greater γ, the more effort competitors will put in and the higher the quality of the contest, therefore, a round robin competition (Eredivisie) is considered to be of higher quality and value than a knockout competition (the Dutch Football Cub), since in the Eredivisie, team play more matches, thereby reducing the chance that one contestant wins thanks to luck instead of skills and effort.

γ will deliver most effort, quality and value in a perfectly balanced league. This is interesting for three reasons:

  1. It suggest a basis for understanding why professional leagues evolved out of knockout competitions or became multi-stage tournaments with elements of leagues.

  2. It suggest why balance in competitions is seen to be potential important to sports leagues.

  3. It suggest why the calibration of tournaments changes to seek to elicit greater efforts.

γ is partly a choice, partly a characteristic of sport, it measures how effort is translated into success. Balance in competition is important.

Team sports

The sports league (clubs, owners and governing bodies that organize competition) can be understood as a monopoly firm or a cartel of firms in an oligopoly market.

Professional team sport in a economic perspective: Labor (mainly players), capital and land (stadiums and other facilities) are combined by clubs who supply teams to produce a saleable product – the game or contest.

The uncertainty of outcome (UO) hypothesis: “A more or less equal distribution of talent is necessary if there is to be uncertainty of outcome, and that uncertainty of outcome is necessary if there if the consumer is going to be willing to pay admission to the game” Rottenberg.

When public interest in sport (and hence attendance and revenue) increases, other things being equal, when teams are as closely competitive as possible: Domination of team A is liable to reduce interest in and attendance at games involving the remaining teams, for instance B versus C and C versus D, even if attendance at games involving team A does increase. In the longer run, even team A would suffer if the standard of competition declines.

Fourth estate / League standing effect: sport is not just confined to those observing the actual contest, but spills over to the general public (positive externality). This permits the media to earn revenue by reporting sports results and the rights to broadcast matches.

If the output of a sports club is considered to be the number of matches played, then not the clubs, but the league determines the level of output. Since in most countries there is only one major league per sport (Eredivisie in Dutch football for instance), the league can be considered a monopolist, with the clubs being plants of the monopolist firm. This is called the natural monopoly view. Natural monopoly: one firm can produce at lower cost, or only one firm survives competition. Neale (1964): Unit of analysis is league, teams are plants.

In another view, clubs are seen as independently behaving firms working together to provide one league competition. This is called the cartel view. This view also implies that individual clubs have the power to step out of existing leagues and/or start new leagues of their own. The cartel view is considered to explain sports leagues better than the monopoly view. Further cartels can suggest that league arrangements can exist with potentially different objectives. Sloane (1971): league is a cartel, output is controlled to maintain high prices. Cartel: once it is there, it is attractive to leave the cartel. Internal instability and external threats.

US team owners tend to have the goal of profit maximization, whereas European team owners are more into utility maximization, of which sport success is a big part. US has closed leagues, Europe promotion relegation, closed product market, open labor market.

The utility level attained depends on four factors:

  1. Performance on the field

  2. Home attendance

  3. Uncertainty of outcome

  4. The excess of post tax profit over a minimum acceptable level of post tax profit.


European leagues where organized according to the SSSL model: Spectators, subsidies, sponsors, local.

Contemporary European leagues are organized according to the MCMMG model: Media, corporations, merchandising, markets, global.

Ownership of clubs

Local investors or single entrepreneurs

Business consortia or single wealthy entrepreneurship, or clubs are publicly quoted corporations

Main source of trading revenue

Gate revenues with some minor sources of sponsorship and merchandising

Media income supported by large-scale merchandising and sponsorship activities.

Labor market

Closed to competition by restriction to the number of foreign players to could be fielded

International scope.

Product market (league)

Closed and based nationally.

Closed and based nationally, but with more internationally organized competition.

Table 3 Differences between SSSL model and MCMMG model

Evidence from both the US and Europe suggests that the success of sports team/clubs is also linked to the economic prosperity/growth of the geographical region the team/club comes from.

Chapter D - Outcome uncertainty

This chapter will demonstrate that the quantitative impact of the uncertainty of outcome (UO) hypothesis is not at all well-established.

Uncertainty of outcome, time-dependent nature

Cairns et al (1986) distinguished four forms of uncertainty of outcome:

  1. Short-term: Outcome of a particular game

  2. Medium-term: Outcome of season, identity of season’s winners in unknown

  3. Within-season: Also medium-term, but focuses on situations where several teams are ‘in contention’ (still in the running for the championship) and looks at series of individual matches (for instance: How many matches does a team still need to win to ensure their win of the title?)

  4. Long-term: Persistent domination that may damage the whole league.

1. Short-term

The idea behind match uncertainty of outcome (short-term) is that spectators prefer closely tied matches and are more likely to attend future matches if the level of ability of the teams is equal. The closer the probability p is to 0.5 the more attractive the match should be and the greater the attendance. In presence of home advantage and ignoring draws the most attractive game would be where p is less than 0.5.

There are three broad approaches to measure match uncertainty of outcome:

  • Relative league standings: The position of both opponents on the league ranking relative to each other is used as an indication of the likely outcome of a match.

  • Implied prior probabilities of home wins through the use of betting odds: The odds that bookmakers offer for specific bets are used as indications of the likely outcome of a match. This is more complete than relative league standings, because this also takes into account things like injuries, suspensions and loss of form.

  • Direct estimates of the probability of home wins: Numerous data types can be used as direct estimates, for instance the number of red and yellow cards, television ratings and point acquired by teams in previous matches.

2. Medium-term

Use averages of measures like the spread between top and bottom raked teams, the number of games a team is behind the leader or the number of teams that are or have been in the top four is one way to measure medium-term uncertainty. If for each measure the average is calculated for example four points in the season, a prediction of the final ranking and the winner may be made. The closer to the end of the season, the more valuable is the calculation.

3. Long-term

Researchers look at competitive balance when investigating long-term uncertainty of outcome. A competition is completely balanced when for example a league is won by a different team every year. In practice this never happens, because some teams are just much better than others and may win the league a few times in a row, for example the Internazionale in Italian football – the Serie A.

Whether the unbalance is severe enough for concern is what researchers and policy makers are interested in. Concern is for example that people may not be willing to visit matches anymore, because one team or a few teams are too much the favorite. Many researchers have tried to find out if competitive balance has an effect on spectator attendance. Although they used very different ways to measure this, and some did not find any significance results, there is some evidence that attendance is indeed affected by competitive balance.

Gibrat’s law of proportional effect: The size of a firm and its growth rate are independent. If Gibrat’s law holds, one would expect the size distribution of the firms in an industry to remain constant.

Home advantage

In sports like football, baseball and ice hockey and in balanced leagues home advantage is present most clearly. Balanced leagues is where teams play each other two times, one home game and one away game

Four factors that may cause home advantage have been identified:

  • Familiarity with the location

  • The effect of travel

  • Location-related rules

  • The crowd.

Chapter E - Professional sports leagues and cross-subsidization

Leagues have always an important economic influence. Intervening in sports labor markets (setting rules for transfers of players, player salaries etc.) and regulating the distribution of club revenues are the two main ways in which cross-subsidization takes place.

An economic rationale for cross-subsidization lies in the market structure of sporting leagues which can be viewed as oligopoly markets operating as producer cartels within which clubs need to compete in sporting terms, but also to cooperate to ensure that the sports are managed effectively.

Methods of cross-subsidization

Leagues can influence clubs’ talent, finance and results by applying three major types of labor market policy instruments:

  1. Drafting systems: Mechanisms to (re)distribute players or talent among clubs (for instance promotion and relegation, or in the US by letting the weaker teams choose first from the ‘new supply’ of college graduates).

  2. Salary caps: Measures to directly influence finances and salaries (for instance setting maximum wager or a maximum amount clubs are allowed to spend on salaries. In the US, the NBA, hoping to strengthen weaker teams’ finances, adopted a salary cap in 1980. Potential problems apply to salary caps. On the one hand, side payments may be offered to players to ensure that they play for the club that have the economic resources to attract them. On the other hand, the farm system developed in baseball to provide to hoard players, while not having them appear on the payroll -> Economic incentives do exist to avoid the policy intent of the salary cap).

  3. Reserve option arrangements: Mechanisms to influence transfers of players between clubs (for instance since 1880, in the early days of baseball, players were not allowed to transfer, so they had to choose to accept a contract renewal with the current club or retire from the sport. A more recent example is that in football registration of a transfer document with the governing body is mandatory when transferring a player.

The other main form of cross-subsidization adopted by sports leagues is the redistribution of revenue. Regulation of the distribution of club revenues concerns subjects as distribution gate revenues(Gives small ‘access’ to large stadiums. Monies paid by spectators at the turnstiles. A larger club experiences a net reduction in revenue, while the smaller team obtains a net gain in revenue.) and television revenue and split of local television revenue between clubs.

Effects of cross-subsidization

Important rules and assumptions underlying the economic framework for understanding cross-subsidization are:

  • Behavioral assumptions (profit/utility maximization)

  • Endogenous variables (competitive balance, wages)

  • Zero-sum restriction: Win percentage is constant

  • Zero-sum assumption: Stock of talent is constant

More detailed:

  • Win percents in a sports league sum to 0,5N in a league with N contestants in which no draws are possible, so if there are only two teams in a league, then win percents are equal to 1

  • The sum of changes in teams’ stocks of talent is 0

  • The total amount of talent is fixed and teams hire it all at market price (constant MC) in a closed market

  • Team owners want profit maximization and buy talent in a perfectly competitive market (all clubs pay the same price per unit of talent)

  • A club’s total revenue is driven by its win percent and home market size

  • Big market teams (big city) have higher revenues and more market power than small market teams (small city)

  • Marginal revenue of winning teams is positive, but diminishes as the team keeps on winning (since then spectators lose interest)

  • Total revenue is 0 when a team has either no talent or has monopolized the league’s talent.

  • If a team’s talent increases by 1%, its win percent also increases by 1%

  • In a two-team league, if one team’s talent increases by a certain amount, than the other team’s talent will fall by the same amount.

  • A team’s win percent is equal to that team’s share of talent.

Profit-maximizing competitive equilibrium

Fort and Quirk’s (1995) two-dimensional model assumes that a club’s total revenue R is driven by two factors: their win percent w and their home market size m: Ri = Ri (mi,wi).

R = 0 if one has all talent, or no talent.

A team’s win percent w can be related to the amount of talent it hires relative to total talent, in the two-team case, where ti is the actual number of talents hired by the ith team:

W1 = t1 / (t1 + t2). This is a contest success function, in which the possibility of winning a contest is directly connected with the relative share of talent held by a team.

In figure 9.1 on page 242, MR1 is the marginal revenue of team 1 (big city) and MR2 is the marginal revenue of team 2 (small city). MR1 is above MR2, because big cities have higher revenues and more market power that small ones.

The right graph shows team 1’s share of talent from left to right and team 2’s share of talent form right to left. An increase in team 1’s win percent is met by an equal decrease in win percent of team 2, as shown in the table. E is the equilibrium level of production in the league. Since the win percent op team 1 in equilibrium is 0,6 and that of team 2 is 0,4, there is an unbalanced league. Point E is the equilibrium, because at any other point (to the left or to the right) one of the teams would have higher MR than other. Then, the team with the higher MR would hire more talent and the one with the lower MR would sell more talent, until equilibrium is met. In point E, both teams are willing to pay the same for talent.

Note: the big city team does not always has het higher wins percent, although it is more likely. When the small city dominate, MR1 would simply represent the marginal revenue of the small city.

Reserve option arrangements

Introducing reserve option arrangements in the figure 9.2 on page 244, will have the effect that the price of talent is depressed below its equilibrium value and that players wager are hold back. Next is that the team with the lowers MR, the weaker drawing team, can sell talent to the stronger team. So, the introduction of a reserve option arrangement will benefit the weaker team financially at the expense of players and the stronger team. Research has found no evidence that introducing reserve option arrangements affect competitive balance of the league.

The introduction of a drafting system has a similar effect. It makes weaker teams more profitable by giving them access to more/cheaper talent, which they can then sell again and by lowering wages, at the expense of stronger teams. As soon as MR1 ≠ MR2, teams will trade talent. Research has found no evidence that introducing a drafting system affects competitive balance of the league.

Enforcing a salary cap to the league of the model would affect competitive balance. Again, research has not found support for this. A salary cap may be effective but is hard to enforce.

Revenue sharing to the model would cause both teams’ marginal revenue to fall below what they would have been otherwise, in the absence of reallocation of talent, as shown in figure 9.3 on page 247. Equilibrium in the presence of revenue sharing is at E* where win percent is identical to that E and the price of talent has fallen to c* below c. An alternative form of revenue sharing is pool sharing, where teams contribute to a central pool which the league makes a redistribution from.

Invariance proposition: competitive balance is invariant to changes in league policy.

Win maximization

As shown in figure 9.4 on page 249, in a win-maximizing league, the market equilibrium (Ew) occurs when the clubs’ ARs equals the marginal cost of talent. This is compared to Ep, the market equilibrium in profit-maximizing leagues. In a win-maximizing league, talent is more highly prices, since AR always exceeds MR. A profit-maximizing league favors the big cit team, whereas a win-maximizing league favors small city team, regarding talent distribution.

In a win-maximizing league, total revenue is not maximized: at a win-maximizing equilibrium the teams’ MR are unequal, implying that if players transfer from Team 1 the revenue it loses is less than the revenue gained by Team 2. Win-maximization has more domination than profit maximization.

Reserve option arrangements, drafting systems and salary caps have all no effect on competitive balance in a win-situation. However, a revenue distribution may have such an effect, provided it benefits Team 2. Than Team 2’s AR function will rise and Team 1’s AR function will fall, but relatively less than Team 2’s AR function rises, since Team 1 began with more revenue. The distribution of talent will shift in favor of Team 2 and the cost of talent will increase. Thus, revenue distribution in win-maximizing leagues benefits small teams relatively more than is troubles dominant teams and consequently promotes more competitive balance and raises the price of talent.

As long as it does not produce an economic loss, a win-maximizing team will hire as much talent as it can to generate wins. If team 1 has the larger market (big city) and if both teams’ spectators feel the same about the uncertainty of outcome, than Team 1 will have the larger share of talent. Team 2 (small city) is more likely, but still relatively unlikely) to dominate the league in a profit-maximizing league. Research suggest that the advantages of market size might be compensated by either the declining marginal productivity of talent and/or by size diseconomies. Talent: a player may be more valuable to a weaker team since its win rate is lower than the stronger team, and so the player is of more relative value to the weaker team. Size diseconomies: Larger teams are relatively less productive in producing wins than smaller teams.

Owner objectives, spectators preferences, the number of teams in the league and whether teams behave like oligopolistic are factors that depends on the ability of revenue sharing. (Oligopoly: A market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors.) Revenue sharing and salary caps are unlikely to be implemented in practice, because if it is done in one national league, this league’s competitive position versus other (inter)national leagues will worsen. The only realistic chance for such cross-subsidization mechanisms to be introduced is for all leagues to act in concert and implement it simultaneously.

Chapter F - Attendance and broadcasting of professional team sports

Figure 10.1 on page 262 shows demand curves for professional sports match tickets. Two effects are shown:

  1. An increase income of spectators will cause them to demand more tickets when the price stays the same: the curve shifts to the right.

  2. When income stays the same but ticket price fall, demand will increase: a move down the (left) curve occurs.

When income falls or prices go up, both effects can also work the other way.

Figure 10.2 on page 263 shows actual and latent spectator demand. Sport stadium have limited capacity. Sometimes, demand is greater than supply, causing the stadium to be full while there are still more people willing to get a ticket (excess demand). This is what the right graph shows.


Preferences could be treated as constant or as fixed, according to the basic theory of consumer demand. In the context of professional sports demand, consumer preferences may be affected by a number of factors, including the quality of the experience of the sports contest, (preference of) others in the community, past experiences of watching the team and geographical area; people usually identify themselves more with teams that are from the region they live or grew up.


The attendance of a match is depending on different factors:

  • Attendance: season tickets, boxes, one-off

  • Capacity of stadium

  • Demand for sport on television: complementary of substitute

  • Full opportunity cost: ticket, price, transport

  • Time of the match

Economic models are used by researchers to measure variables like match attendance. The scope and scale of sports research has been limited by three problems, in this research football and baseball have been dominant. The three problems may occur when using such models are:

  1. Simultaneity – When an estimated coefficient is derived from an equation in which the independent variable is actually determined from another equation.

  2. Multicollinearity – Regressors are measuring different dimensions of the same influence on demand, independent variables are too closely related.

  3. Heteroscedasticity – Variability in the behavior of fans from different population segments and
    Serial/autocorrelation – The random errors affecting the dependent variable are linked over time.


Factors that influence demand are:

  • Preferences: athletic performance, absolute/relative competition, communality, winning

  • Constraints: income, time

Price inelasticity suggests that sports fans are not sensitive to changes in ticket prices. Sports fans have price inelastic demand according to research. A price elasticity of -1.0 means that a 1% price raise will reduce attendance (demand) by 1%. In this case, revenue remain constant, since revenues = price * attendance. If price elasticity Is lower than -1.0, revenues will decrease at a price increase: demand is price elastic and clubs should lower prices. If price elasticity is between 0 and 1.0, revenues will raise at a price increase: demand is price inelastic and clubs should raise prices. Season ticket holders appear to have inelastic demand compared to casual spectators.

As shown in box 10.3 on page 285, profit-maximizing teams should price in the elastic portion of their demand curve. Because MR measures the change in revenue following a change in price, a falling price can only reduce revenue with an inelastic demand. Reducing revenue means that MR must be negative, so it follows that a negative MR following a price fall must imply that demand is inelastic.

For teams to set their ticket prices in the inelastic portion of their demands must mean that MR and MC are not equal, as in implied in profit maximization. Some profit must be forsaken.

Besides ticket price, researchers can look at total economic price of attendance, which may include (besides ticket price) the costs of travel, food/beverage, merchandise etc.


Customer preferences are made up out of:

  • Quality characteristics: Aspects of the stadium, scheduling of fixtures, weather, quality of the contest/uncertainty of the outcome, quality of the team; whether the team has star players.

  • Interdependent preferences : One’s preferences are affected by preferences of others, and
    Habit persistence: Loyalty; earlier attendances affect current attendances.

  • Spatial context: Market size matters; larger population base raises attendance.

Broadcast demand

Sport broadcasting has long been a ‘public’ good in some countries, for instance in the UK. But at some point, private broadcasting companies emerged to break open up the monopolistic position of the public broadcaster. The emergence of larger broadcasting companies and competition in the market let to a rise in media-related income for sports clubs.

Broadcasting revenue distribution differs per country. For example, in England’s football, the Premier League, 50% of TV revenues is divided equally among all clubs, 25% is allocated according to the league standings and 25% is allocated according to the number of live matches a team/club features in. In all major European football leagues a growth in revenues from broadcasting has taken place over the last years. Also in other sports, like rugby and cricket, a similar trend is visible.

Broadcast differences between US and Europe are:




Pay willingness


Premium pay TV


Collective bargaining with revenue distribution

Sport dominates broadcasting market

One sport: Football

More sports: for instance baseball, American football, basketball


Segmented, one for every country

Economies of scale, the markets for sports are national, one big segment


Not receptive to designing their competitions around media needs

Receptive to designing their competitions around media needs


More open on opening up the media market to competition

Tighter on opening up the media market to competition

Table 4 Broadcast differences between US and Europe

Because consumers prefer high uncertainty of outcome, leagues have developed to provide higher uncertainty of outcome and more closely tied matches. For instance by introducing supra-national competitions like the Champions League. Especially at the end of the season, broadcasters use this knowledge, they will for example broadcast matches with higher uncertainty of outcome first, more often or show a longer summary of them.

Chapter G - The professional team sports labor market

Sports labor markets are assumed to be perfectly competitive. Teams will hire up to the point where the wage (the marginal factor cost) is equal to the marginal revenue products of labor (the revenue earned from the last unit produced by a worker). If the wage rate rises, profit-maximizing firms (clubs) will reduce their demand for labor and increase their demand for capital (for instance stadium and related land). In sport industries, it is not possible for teams to substitute capital for labor of the wage rate increase, because of labor that ultimately produces the sports contest.

Historic evolution

In the US baseball, historically sports contracts were very tight on the players, binding them to clubs for periods up to six years without option of transfers. In time, after a number of legal cases between players and team owners, regulations became more free and players could more easily get a transfer to another club. Further, salaries in most big US sports, especially baseball and basketball, increased extraordinarily in the 1960s, 1970s and 1980s. For instance in baseball, the salaries increased up to 730% between 1975 and 1985.

Rules concerning transfers were also much stricter than they are now in early European football. Further, there was a maximum to players’ wages. The terms of players’ contracts basically lay with the clubs. Since1963, when the first lawsuit was won by a player who want to transfer but was prevented from this by his club, the ‘freedom of contract’ expanded. This freedom of contract caused transfer fees and salaries to rise rapidly, as larger clubs competed to sign talent. furthermore, due to internationalization an d Europeanization, EU laws and regulations on sports have become more structured, including rules on transferring players. For instance unilateral breaches of contracts can tack place at the end of the season and require the payment of a fee.

In both Europe and the US a growth in the role of player agents has taken place with the market liberalization, mainly since the 1960s. Since agents receive a percentage of the transfer fee of players, the very presence of agents may be a reason why transfer fees are still there. Clubs, agents and players in the market means a three-way principal-agent relationship.

The Bosman ruling arose because Jan Marc Bosman took two clubs (RC Liege and US Dunkerque) to the European Court of Justice under article 177 of the Treaty of Rome, which enshrines the free mobility of land, labor and capital in the EU, for damaging his employment opportunities by fixing a transfer fee. The substantive outcome of the Bosman ruling was that no fee could be expected by clubs on the transfer of an out-of-contract player. Although the Bosman ruling was a relatively minor legislative change.

Further liberation of the players’ labor market is expected with the Webster ruling. The Webster ruling is a test case in soccer lay involving Andy Webster. In September 2006 he became the first player to exploit the updated transfer regulations of FIFA that players who sign when aged ≤ 28 are able to terminate those contracts after three years, and clearly the player can now decide whether they wish to play even within the contract period. The ruling was initiated in response to fears that the EU would abolish the transfer system altogether.

Table 5 presents a classification of labor market structures, which essentially maintains that firms, in this case teams, are profit maximizing.


Low club power

High club power

Low player power

Perfect competition:

‘Just wage’


‘Exploitation of players’

High player power


‘Star model

Bilateral monopoly

‘Bargaining over rente’

Table 5 Labor market structures for a profit-maximizing league

Theorizing the players’ labor market

Neither clubs nor players have enough power to influence wage rates in perfect competition. The wage rates are set by the market.



Clubs have the power to influence wage rates, enabling them to exploit players



Some players have such high talent levels that here is no apparent substitute for them; they have the power versus clubs to demand high wage rates (wages are demand-driven)

Bilateral monopoly


Both clubs and players have market power and wage rates are subject to bargaining. Game theory can be applied (conflict vs. non-conflict situation, cooperative vs. non-cooperative games, information symmetry vs. information asymmetry.)

Figure 11.2 on page 311 apply to profit-maximizing leagues. In win-maximizing leagues, clubs will pay a wage equal to its average net revenue. Since this exceeds marginal revenue product, the club will pay wages in excess of marginal revenue product, thus clubs overpay their players. Win-maximizers pay their players higher wages than profit-maximizers. From this perspective, it can be argued that European football has evolved from a set of profit-maximizing national monopsony leagues into a set of win-maximizing leagues that operate in a largely unified talent market.

A1, A2

Perfectly competitive firm’s demand for labor


Weekly supply of hours to (perfectly competitive) price-taking firms in the labor market


The demand for labor of a firm (club) in perfect competition: equals revenue product of the prefect competitor.


The monopsonist’s marginal cost of labor


The demand for labor of a firm (club) in monopsony: equals revenue product of the monopsonist

W0, W2

Wage levels

E0, E2

Working hours

Table 6 Significance figure 10

The perfect competitor maximize profit where B2 intersects A2, giving W0, E0 as the perfectly competitive equilibrium wage-hours combination. The monopsonist maximizes profit where B3 intersects A3, but the monopsonit’s equilibrium wage-hours combination is W2, E2. Under monopsony, A3 exceeds W2, signifying exploitation of labor. In monopsony, firms/clubs have more power than players and therefore wager are lower: W2

Some econometric findings

The following results are produced by research studies regarding the player’s labor market for the US:

  • Players wages are indicated to be between 10% and 50% of their marginal revenue product.

  • In US baseball the presence of monopoly power of players (superstar effect) was confirmed: As performers’ ability increases, so does their salary, but at an increasing rate.

  • Longer contract and higher wages are enjoyed by better performers, but there is a performance-related trade-off between wages and contract length.

  • Removal of labor market restrictions has tended to produce higher wages, reduce monopsonistic exploitation and increased contract duration.

  • Which type of labor market structure (table 5) dominates is unclear.

The following results are produced by research studies regarding the player’s labor market for Europe:

  • Rent-sharing by clubs as a result of players transfers is confirmed.

  • The increasing trend of transfer fees has been influenced most by buying cubs: buyer-led.

  • In Europe, about 10% of all players is transferred every year. Players who transfer are not a random sample. Variables such as experience, scoring ability and international status make players more likely to be transferred and to command higher fees when transferred.

  • The Superstar effect have been identified, for instance in Italian football. However , this in not everywhere the case, for instance not in German football. The Superstar effect exist because of fan interest in forward, goals scoring players.

  • Since it s difficult to disentangle from the effort of the players, the effect of coaches/managers on sporting success is hard to determine. One way to measure the effect of coaches/managers is to look at higher or lower than expected win percents of teams. Research found that the duration of a coach’s tenure at a club is positively related to team efficiency and success. The effect works the other way round as well: Efficiency and success tend to prolong a coach’s status.

  • Efficiency is in general falling due to increasing demands for success, found by two studies of English football.

Chapter H - Infrastructure and sports events

The specific definition of a sports event can vary although, they tend to be united in recognizing that events do not directly refer to professional sports leagues. Sport events can be categorized according to:


Irregular: Olympic Games, every 4 years

Regular: Tennis Grand Slam, every year

Level of competition

Regional/local: Amateur club championship

National: Eredivisie

International: Champions League

Single or multi-sport

Single: Tour de France

Multi: Olympic games

Economic scale and impact

With respect to attendance, media coverage, sponsoring etc.

Large-scale: Rotterdam marathon

Small-scale: Regional amateur football tournament

Ownership of the event

International sport federation: IOC, FIFA

Private owners: Tour de France organization ASO

Location and assignment

Always the same: City marathons

Rotating: World and European Cup football

In the UK, the Sports Industry Research Centre (SICR) has provided a specific taxonomy of events connected with their sporting significance, economic impact, regularity and scale:

Type A

Irregular, one-off, major international spectator event generating significant economic activity and media interest

Olympic Games, football world cup, European football championship

Type B

Major spectator events, generating significant economic activity, media interest and part of an annual domestic cycle of sports events

FA cup final, six nations’ rugby union internationals, test match cricket, open gold, Wimbledon

Type C

Irregular, one-of, major international spectator/competitor events generating limited economic activity

European junior boxing/swimming championship, world badminton championship, IAAF grand prix.

Type D

Major competitor events generating limited economic activity and part of an annual cycle of sports events

National championships in most sports

The level of attendance and participation in the event and the economic significance of the event are the issues most looked at in analyzing sports events. Theory suggest that the highest level of participation need or attendance not always apply to the events of highest competition levels, since the economic significance of these events may be low. An example of this is the final of the European championship in judo, this may not attract as many spectators as an average Premier League football match, even though the competition level of the judo event can be considered to be higher than that of the football match.

Organizers of an event have to find a balance between offering a large enough prize and distribution (to attract competitors, high effort, spectators and sponsors) and remaining profitable (or at least not incur losses).

In sport events other than in most sports competitions and leagues (where only the winner receives a price), often multiple ‘high finishers’ receive prices. For instance the Olympic medals for the top 3 contestants; prize money increases with rank in tennis Grand Slams. One reason for this is that events mostly have large numbers of contestants, so the chance of actually winning is relatively small. If only the winner would get a prize, many contestants would display low effort or not even compete at all, undermining the economic sustainability of the event. Another reason is that the overall quality of the competition and competitive balance are more important to organizers and spectators than a single great performance.

As prizes in events are higher, both performance and selection of contestants are positively affected. Thus, the higher the prizes are, the more effort and the better the performance of contestants will be and the better competitors are likely to enter the highly paid events. Further, competitors are only likely to enter events which they perceive to have an opportunity to win.

Rises in prize money form an increasing incentive to cheat (for instance doping) in order to

get a prize. And the incentives for competitors to elicit effort should increase with rank, suggesting that prizes should be spread, so not only the winner should receive a prize. Further, for some events (Olympic Games, World Cup football), countries/cities have to ‘make a bid’ in order to get to host the event. This process can be seen as a competition in and of itself, with the right to host being the prize. This in turn can also create incentives to cheat (bribery). There is a form of monopoly supply of the product for these events.

Investment decisions

Investment decision making is important to organizers of spots events. When making investment decisions, the following two things considerations are relevant:

  1. Establishing an objective for the investment: For the private sector investors this will probably be profit-maximization, any investment that yields a positive net present value should be accepted, as it is assumed that these contribute to profit-maximization over time.

  2. Assessing the mutually exclusivity or independence of the investment decision: is the investment unique or part of a portfolio of investment options?

Public sector rationale

Possible aims of investment include:

  • Facilitating international sporting success

  • Facilitating professional sports teams

  • Hosting national teams

  • Hosting local, national and international events.

The public sector should invest in sports, because there are benefits from investment in international success and from hosting sports events and investing in infrastructure.

Benefits from investment in international success (supporting national teams in international competitions) include:

  • Increased feel-good factor stemming from sporting success

  • Enhanced image of the country

  •  Positive externality: Enhanced productivity and consumer confidence following sports success.

Benefits from hosting sports events and investing in infrastructure include:

  • Positive externality: Ongoing benefits for the community: increased tourism, enhanced sports participation.

  • Multiplier effect: Attraction of new visitors helping to sustain economic activity, also in sectors besides the sport itself like food and drinks, hotel, transport.

  • Contribution to future sporting success.

Besides externalities, economic benefits can result from investments through the multiplier effect. Some investment projects which are by themselves not profitable, may generate wider economic benefits for society and make the investment meaningful.

The multiplier

The flow between economic agents is called ‘Circular flow of income’. There are leakages from the circular flow of income in the form of household savings, taxation, imports and exports. Each of these can reduce the circular flow of income. The multiplier effect is linked to the injection of resources to the circular flow of income and its expansion. The multiplier effect consist of:

  • Direct effect: The initial increase or income connected with the injection of resources by the sports event.

  • Indirect effect: The increase in expenditure or income generated as a subsequent result of the sports facility construction or hosting the event.

  • Induced effect: The increase of expenditures on, or incomes received by suppliers and employees of the organizations that supply those building the facilities or running of a sports events

  • The multiplier can be calibrated as: Direct effect + Indirect effect + Induced effect.

Deriving from a combination of production factors land, labour and capital can economic output be understood. This gives the following equitation:

pY = rtLd + wL + rK






Price of output (for example ticket price



Rental value of land (for example price of land per acre)






The wage rate (for example of athletes and employees of a stadium






Cost of capital (for example, profit rate)




The value of economic output is the product of the price level and the level of real economic output.

If prices are known and land and capital are fixed, employment can be given as a proportion of the value of output:

E (employment) = (pY – rtLd – rK) / w

Externalities and multiplier effects can only occur when a market failure has taken place, thus not in a perfect competition where resources are fully deployed and the economy would always fully adjust to equilibrium. However, if there are unemployed resources in the economy, an injection to the circular flow of income lead to an expansion of real economic activity.

The Perfect competition model suggests that market prices will adjust rapidly to reallocate resources, thus there can be no net increase in real economic activity. In practice the supply side of the economy often takes time to adjust to a demand side change following an injection of resources. Two scenarios are possible:

  1. An injection of investment initially appears to raise real output.
    This is because economic agents misconstrue the injection as leading to an increase in real income. In fact, the market system will generate full employment in the long-term and so only a nominal increase in income occurs.

Consequently, as prices begin to rise, the economy is forced towards its long-term real output level, but higher prices will stabilize for the economy over time.

  1. The multiplier effects presuppose that the level of supply capacity is fixed.

It is inherently a relatively short-run perspective. The multiplier works b the re-deployment of previously undeployed resources.

An injection of investment in one geographical area may crowd out the expenditure in another area or increase leakages from that area. Crowing out = At an economy full of employment, public expenditure can only take place at the expense of private sector investment. For instance, if a new sports stadium helps to promote further investment into a region, elements of this may come from suppliers relocating their business. This means a loss to the region from where they come. If the stadium helps to promote tourism, elements of this may include reduction in tourism and expenditure elsewhere.

Decisions to make sports investments rely on the assumption that markets cannot employ all economic resources fully (market failure), causing spill-over effects to exist.

The effects of sports investments weaken over time and actually completely disappear at some point, except if there is a continuous injection of resources (repeated investment). That is why often organizers of large sports events like the football World Cup do not invest in new stadiums, but rather make use of already existing ones. The higher the level and the longer the duration of a sports event, the larger the economic value that will be connected with the event.

Theorizing economic activity as an impact

There are three main concepts that can be used to measure economic activity:

  1. Economic significance: The total value of all transactions involved.

  2. Economic impact: Net benefits to the economy as a whole as a result of the investment.

  3. Economic welfare: is maximized where economic efficiency is maximized.

Practical measurement of economic activity as an impact

A number of things should be taken into account when measuring economic activity as an impact:

  • Adjusting prices: Taking out the effect of subsidies and taxation

  • Multiplier effects

    • Export injection multipliers

    • Input-output models

    • Computable general equilibrium models (CGE)

  • Non-market valued effects: Total economic value is considered to have more than one dimension (externalities exist). Total economic value breaks down in two main categories. These values can be measured by revealed preferences (for instance travel costs) or stated preferences (for instance willingness to pay)

    • Use values

    • Non-use values

  • Increased productivity and consumer confidence: These can change through the impact of international sporting success on feel-good factors. To measure this, impact of sporting success and subsequent economic benefits on share price returns if focused on (for instance through event studies).

  • Other impacts: The impact of sporting investment or hosting sports events on community cohesion, community image and sports development are still underdeveloped in research.

Export injection multipliers: an initial injection of expenditure from outside the economic system is magnified through interlinked spending in the economy. The impact of imports and taxes reduces the value of this multiplier.

Input-output models: examines the impact changes in economic activity that one sector have on another sector, assuming (among other things) that proportions between inputs and outputs are constant. While input-output models can measure al of the positive impacts of an event, they are incapable of measuring most of the negative impacts, so they consistently overestimate the impact of events.

Computable general equilibrium (CGE) models: contrary to input-output models, CGE models take into account the possibility of price changes crowding out the effect of injections.

Use values: connected with the investment’s actual use or potential use.

  • Actual use value: ticket price and any additional value, for instance the amount greater than the ticket price that a consumer would be willing to pay.

  • Potential use value: valuation placed on the intended future use of the investment

Non-use values: connected with the valuation placed by individuals on the existence of the investment.

Empirical evidence

In empirical research, investment in sport is a growing domain. The empirical research on this subject has produced varying results and is the basis of much debate. The research is divided into two categories:

  1. Ex ante evidence

  2. Ex post evidence

Ex ante evidence

Ex ante evidence tends to derive from proponents of investment and is sometimes deliberately misleading: more than once different researchers used different methods to study the same sports event and produced very different results. Thus overall, the evidence to provided on public investment in sports is quite unreliable.

Ex post evidence

Ex post evidence tends to come from independent academic sources. Ex post results has derived consistent and reliable results. These suggest that hosting sports events has no or a negative effect on employment or the value of the economy. Further, there is a incentive for policy makers to overstate the benefits from hosting major events or investing in sports infrastructure. Corruption, misleading behavior, influence of lobbyist or the monopoly power of sports leagues can be a reason for this results.

The monopoly power exist for example with the IOC and FIFA, and can cause cities/countries to over-bid, when making a bid to get the Olympic Games or World Cup. Further, investment in international sporting success can yield changes in consumer confidence and productivity through its impact on feel-good and that this can be reflected in share price returns and stock market returns.

Explaining the variance

The source of variance in results can be caused by technical difficulties, as faulty measurements of multipliers, ignoring other opportunities of investments. The literature on the non-market value of sports infrastructure and investment is not yet very much developed and results are only available from a few single studies. Therefore there is not yet a significance influence on investment or sports policy.

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