The Economics of Long‐term Contracts in the Footballers' Labour Market
| Author | Babatunde Buraimo,Michael Hickfang,Rob Simmons,Bernd Frick |
| DOI | http://doi.org/10.1111/sjpe.12064 |
| Date | 01 February 2015 |
| Published date | 01 February 2015 |
THE ECONOMICS OF LONG-TERM
CONTRACTS IN THE FOOTBALLERS’
LABOUR MARKET
Babatunde Buraimo*, Bernd Frick**, Michael Hickfang**
and Rob Simmons***
ABSTRACT
Peter Sloane’s seminal article in this journal on the objectives of football clubs
argued that utility maximising clubs would seek out player talent more aggres-
sively than profit maximising clubs and that this accumulation of player talent
by larger teams might need to be checked by redistribution of revenues. We sug-
gest in this article that, in a context of rising revenues and high rewards, the
pressures to acquire more and better talent so as to out-perform other teams on
the football pitch leads to a requirement for teams to practise effective contract
management. Using a large dataset from the German Bundesliga, we find that
players with longer term contracts perform better, ceteris paribus. Hence, selec-
tion effects in the award of long-term contracts dominate moral hazard (shirk-
ing) effects in the Bundesliga.
II
NTRODUCTION
Peter Sloane’s, 1971 seminal article on utility maximising behaviour of sports
clubs remains a powerful characterisation of the economics of modern team
sports leagues, including European football leagues. Sloane’s earlier 1969 arti-
cle set out the essential features of the player labour market comprising
monopsony power of clubs and restrictions on player mobility covered by the
‘retain and transfer’ system where players could only move between employers
with the permission of the club currently holding a player’s registration and
then with the right to extract a payment for loss of services (a transfer fee)
from a hiring club.
Since these articles were published, revenue streams and player salaries have
risen considerably across European football leagues. In particular, in the
labour market, the Bosman ruling of December 1995 affirmed the principle of
free movement of labour across European Union boundaries and made the
previous retain and transfer system untenable. Over the 1990s and 2000s in
*University of Liverpool
**University of Paderborn
***Lancaster University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12064, Vol. 62, No. 1, February 2015
©2015 Scottish Economic Society.
8
particular, European football grew in popularity as manifested by buoyant
attendance growth in most European leagues (especially England, France,
Germany and Spain) and growth in television broadcast demand for live foot-
ball matches (Dobson and Goddard, 2011).
Peter Sloane highlighted one key property of the footballers’ labour market
that follows from his specification of a utility maximising objective function.
There is a greater demand for talent under the utility maximising objective
compared to a profit maximising objective. This leads to the possibility of a
vicious circle where a small number of clubs could accumulate star talents
and create competitive imbalance in a league. Citing Rottenberg’s, 1956 article
on the baseball labour market, Sloane noted that the private incentive for
clubs to restrain their acquisition of talent was limited only by the club’s bud-
get constraint and this was a weaker incentive than the discipline afforded by
profit maximisation. A utility maximising club has no incentive to deliberately
‘fall behind’ rival clubs, a possibility noted by Rottenberg for Major League
Baseball. However, Peter Sloane was careful to note that the acquisition of
star players does not translate into team success with certainty, observing that
‘football is increasingly a team game relying on the constructive combination
of individual talents’ (1969, p. 137). Hence, the effective management of player
hires and exits is an important component of team success. In a utility maxi-
mising framework applied to football, effective management of player con-
tracts is important for team productivity and owner utility in terms of
progress in League and Cup competitions.
Thus, the design of contract terms, in particular the award and renewal of
long-term contracts to players, has recently become an increasingly important
aspect of player management in football. Effective design of player contracts
is integral to team success in a utility-maximisation framework since players
need to be appropriately motivated and rewarded to out-perform rivals on the
pitch, i.e. win games. This is the concern of the present study. We shall use a
large, rich data set from the German Bundesliga 1, the top division of Ger-
man football, to show how contract terms relate to player performance and
then to player salaries. Specifically, we shall test for the dominance of ‘selec-
tion’ over ‘moral hazard’ or shirking effects using econometric analysis. If the
magnitude of contract length remaining is positively related to our chosen
metric of player performance then player selection effects dominate any incli-
nation for players to shirk just after signing a new contract.
The remainder of the article proceeds as follows. In Section II we assess the
literature on shirking behaviour in sports. Section III presents our data and
models for estimation. Section IV offers our empirical results while Section V
concludes with avenues for further research.
II SHIRKING IN SPORTS
Agency theory predicts that agents may shirk when they are offered long-term
contracts together with guaranteed compensation (Lazear, 1981). The sports
industry provides a useful testing ground for this prediction since firm
THE ECONOMICS OF LONG-TERM CONTRACTS 9
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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