THE CHAMPIONS LEAGUE AND THE COASE THEOREM
| Published date | 01 July 2007 |
| DOI | http://doi.org/10.1111/j.1467-9485.2007.00419.x |
| Date | 01 July 2007 |
THE CHAMPIONS LEAGUE AND THE
COASE THEOREM
Stefan Szymanski
n
Abstract
This paper considers the relevance of the Coase Theorem to the analysis of sports
leagues. It is widely believed that there exists an ideal competitive balance between
teams in a sporting contest, and that without competitive restraints to redistribute
resources championships will be too unbalanced. The paper reviews the empirical
evidence on this issue to date, and then examines a model where the outcome may
be either too little or too much competitive balance. Empirical evidence from
English football suggests that the bias is likely to be in favour of too much
competitive balance. The implications for European football in general and the
Champions League in particular are then discussed.
I Intro ductio n
The Coase Theorem is both one of the simplest and most profound ideas in
economics. Coase’s insight was first expressed in print as a theorem by George
Stigler, following the publication of the famous article ‘The Problem of Social
Cost’ by Nobel Laureate Ronald Coase (1960). Stigler stated it thus: ‘with zero
transactions costs, private and social costs will be equal’. The significance of this
statement is that ‘if private cost is equal to social cost, it follows that producers
will only engage in an activity if the value of the product of the factors used is
greater than the value which they would yield in their best alternative use’
(Coase, 1988, p. 158). In other words, bargaining in an unrestricted market will
produce full economic efficiency (assuming zero transactions costs), obviating
the need to invoke government intervention in the form of Pigouvian taxes and
subsidies to correct externalities. The implications for social policy are profound
– simply by establishing property rights, all externalities will be internalised and
private transactions will be publicly optimal. Most notably, the lesson of Coase
Theorem for environmental economics is that we need only to establish property
rights over the quantities of greenhouse gases in the atmosphere and toxins in
the oceans, and pollution will be controlled at socially optimal, sustainable
levels. Many economists would echo the words of Avinash Dixit and Mancur
Olson (2000). ‘In his article ‘‘The Problem of Social Cost’’, Ronald Coase
n
Tanaka Business School
Scottish Journal of Political Economy, Vol. 54, No. 3, July 2007
r2007 The Author
Journal compilation r2007 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
355
introduced a very powerful idea of great importance. Coase’s article has been
arguably the single largest influence on thinking about economic policy for the
last three decades. It is one of the most – if not the most – widely cited
economics article in recent times’.
Big theorems are notoriously difficult to test. Darwinism remains resolutely
untestable, no one is holding out much hope of testing the theories of Freud or
Marx and even in physics developments such as the string theory remain testable
only in principle. One problem with big theories is that they require big
experiments – experimental frameworks that are capable of capturing a
substantial degree of the complexity that a big theory addresses. In the world
of economics, big theorems such as the fundamental theorems of welfare
economics or the law of demand are generally approached through specific
examples. In this paper the Coase Theorem is approached through the medium
of a sports league. While Coase’s article dates back to 1960, a colleague at
Chicago University published a discussion of the market for baseball players in
1956, which almost completely anticipates the more famous paper (Rottenberg,
1956). As in any team sport the players are the principal asset, and teams have
historically traded these assets, frequently for cash. In baseball, a rule enforced
by the owners, known as the Reserve Clause, prohibited players from moving
teams without the permission of their current employer, effectively endowing the
employer a monopsony right over the income stream of the player. As this
restraint comes under pressure from the players and their union, the owners
sought to defend their rule by arguing that if players were free to move they
would quickly migrate to the wealthiest teams, disturbing the essential element
of ‘competitive balance’ allegedly fostered by the Reserve Clause. Rottenberg
argued, in the manner of Coase, that ownership rules would make no difference
to the distribution of talent in a league. If owners controlled the movement of
players, trade between club would cause each player to move to the location
where his (marginal revenue) product is greatest. If players were free to move,
bidding by the clubs to hire players would produce the same distribution (the
only difference being that any economic rents would now accrue to the player,
not to the owner).
This paper re-examines the application of the Coase Theorem to the market
for players in a sports league. It is shows that plausible trading mechanisms will
not achieve Coasian efficiency. This result is demonstrated using data from
English football. The implications of these results for the development of the
UEFA Champions League is then discussed.
II The Co a s e Th e o r e m an d it s Dis c o n t e n t s
The Coase Theorem has been subject to significant scrutiny in the economics
literature and has been widely challenged (see e.g. Ellickson, 1991; Samuelson,
1995). Three examples of academic critiques are discussed here:
(i) Practicality (e.g. Canterbery and Marvasti, 1992). Even if it is true that
costless bargaining with full property rights produces efficiency, many
economists have argued that this is of little practical value, as most
STEFAN SZYMANSKI356
r2007 The Author
Journal compilation r2007 Scottish Economic Society
To continue reading
Request your trial