Abstract
Revenue sharing is a common league policy in professional sports leagues. Several motivations for revenue sharing have been explored in the literature, including supporting small market teams, affecting league parity, suppressing player salaries, and improving team profitability. We investigate a different motivation. Risk-averse team owners, through their commissioner, are able to increase their utility by using revenue sharing to affect higher order moments of the revenue distribution. In particular, it may reduce the variance and kurtosis, as well as affecting the skewness of the league distribution of team local revenues. We first determine the extent to which revenue sharing affects these moments in theory, then we quantify the effects on utility for Major League Baseball over the period 2002–2013. Our results suggest that revenue sharing produced significant utility gains at little cost, which enhanced the positive effects noted by other studies.
Highlights
Many papers in the sports economics literature have studied the effects of different types of revenue sharing systems on league outcomes
Our purpose in this paper is to investigate the effects of revenue sharing on financial stability more directly by considering its effects on the league distribution of local revenues, and the potential benefits that they generate for team owners
Our results using data for Major League Baseball (MLB) suggest that the benefits to team owners can be significant, and that they provide a motivation for revenue sharing that we have not seen explored in the literature
Summary
Many papers in the sports economics literature have studied the effects of different types of revenue sharing systems on league outcomes. In the simplest case of a sports league, a representative team owner faces an uncertain portion of team revenue (excluding fixed revenues that arise from the Major League Central Fund) from season to season, that takes on only two outcomes, high or low. These uncertain revenues arise from the inherent uncertainty of team performance due to injuries or changes in the performance of competing teams, or changing local market conditions. This behavior is consistent with U.S business data for approximately 5 million small firms whose owners invest a large amount of their own wealth in the business, and typically work at the business
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