OVERINVESTMENT IN TEAM SPORTS LEAGUES: A CONTEST THEORY MODEL

Abstract

ABSTRACT This paper applies contest theory to provide an integrated framework of a team sports league and analyzes the competitive interaction between clubs. We show that dissipation of the league revenue arises from ‘overinvestment’ in playing talent as a direct consequence of the ruinous competitive interaction between clubs. This overinvestment problem increases if the discriminatory power of the contest function increases, revenue‐sharing decreases, and the size of an additional exogenous prize increases. We further show that clubs invest more when they play in an open league compared with a closed league. Moreover, the overinvestment problem within open leagues increases with the revenue differential between leagues.