Competitive Imbalance and Budget Constraints
Chapter 7: Governance of professional team sports clubs: agency problem and soft budget constraint
When studying and assessing corporate governance, mainstream economics refers to the principal-agent model in a context where organizations (firms) operate in a competitive market and whose residual claimants maximize their revenues leading to profit maximization. Transferring such analysis to professional team sports leagues and clubs is not straightforward since a league actually does not operate in a genuine competitive market. A league is a monopoly on the supply side of its product market and a monopsony on the demand side of its major input (talent) market; both markets are not purely or even practically competitive. By the same token, tied by the co-production of their games and league rules, clubs behave as members of a cartel and benefit, through league revenue redistribution, from a windfall rent derived from the league monopoly and monopsony positions. Thus, even if teams are assumed to be profit maximizers, like they are supposed to be in closed North American professional team sports leagues, a team’s access to profit is driven by a specific economic environment of monopoly pricing, supply side restriction on quantities and demand side bargaining power that usually guarantee a profit that includes monopoly and monopsony rents, on the one hand. On the other hand, profit maximization is the best hindrance against lasting deficits and debts, and keeps clubs from running under a soft budget constraint.
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