Revenue sharing in professional sports leagues

Abstract

We employ a model of n heterogenous profit-maximizing clubs to analyze the impact of revenue sharing in a professional sports league. Individual revenues depend on both talent demand and competitive balance. We identify three effects of revenue sharing. The revenue effect reduces talent demand of each club because a part of the revenues is generated by competitors. The asymmetric cost effect supports the first effect, and is even stronger for weak clubs. The competitive balance effect makes clubs more sensitive to competitive balance. We show that the asymmetric cost effect unambiguously dominates the competitive balance effect so that revenue sharing decreases both talent demand and competitive balance, and thereby aggregate profits and social welfare.