Ignoring millions of Euros: Transfer fees and sunk costs in professional football

Abstract

According to neoclassical economics, sunk costs should be ignored in the decision-making process. Although experimental evidence tells us that subjects often fail to do so, field evidence for this behaviour remains scarce. Most empirical articles use data from draft systems in professional sports and analyse whether a player’s draft order affects his time on the pitch. In contrast to the draft system, European football teams frequently spend large amounts of money on transfer fees. The discrepancy between fee-bound and free transfers arouses suspicion to encounter the sunk-cost fallacy among football managers. Using data from Germany, I investigate whether this is indeed the case, i.e. that player utilisation is affected by initially paid transfer fees. I hereby contribute to the literature in three ways. To the best of my knowledge, I am the first to examine the sunk-cost fallacy in European sports and professional football. Second, I am able to control for confounding factors previous studies have expressed concern about. Third, I conduct the analysis on the level of individual matches, thereby obtaining a sample size many times larger than that of comparable studies. Unlike the majority of previous articles that studied the sunk-cost fallacy in the context of professional sports, I am unable to find evidence supporting this behavioural bias on a seasonal level. A more detailed analysis on the match level reveals a sunk-cost effect which, however, is economically negligible and decreases with a player’s tenure. The results therefore corroborate a rational behaviour among professional sports team managers.