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The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues

Author

Listed:
  • Helmut M. Dietl

    (University of Zurich)

  • Markus Lang

    (University of Zurich)

  • Stephan Werner

    (University of Zurich)

Abstract
This paper presents a model of a professional sports league and analyzes the effect of luxury taxes on competitive balance, club profits, and social welfare. It shows that a luxury tax increases aggregate salary payments in the league and produces a more balanced league. Moreover, a higher tax rate increases the profits of large-market clubs, whereas the profits of small-market clubs only increase if the tax rate is not set inadequately high. Finally, we show that social welfare increases with a luxury tax.

Suggested Citation

  • Helmut M. Dietl & Markus Lang & Stephan Werner, 2010. "The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues," International Journal of Sport Finance, Fitness Information Technology, vol. 5(1), pages 41-51, February.
    • Handle: RePEc:jsf:intjsf:v:5:y:2010:i:1:p:41-51
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    References listed on IDEAS

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    1. Helmut M. Dietl & Markus Lang & Stephan Werner, 2009. "Social Welfare in Sports Leagues with Profit‐Maximizing and/or Win‐Maximizing Clubs," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 375-396, October.
    2. Olugbenga Ajilore & Joshua Hendrickson, 2005. "The impact of the luxury tax on competitive balance in Major League Baseball," IASE Conference Papers 0517, International Association of Sports Economists.
    3. Thomas Hoehn & Stefan Szymanski, 2010. "The Americanization of European football," Palgrave Macmillan Books, in: Football Economics and Policy, chapter 3, pages 52-96, Palgrave Macmillan.
    4. Sonia Falconieri & Frédéric Palomino & József Sákovics, 2004. "Collective Versus Individual Sale of Television Rights in League Sports," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 833-862, September.
    5. Helmut M. Dietl & Markus Lang, 2008. "The Effect Of Gate Revenue Sharing On Social Welfare," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 448-459, July.
    6. Dietl Helmut M & Lang Markus & Rathke Alexander, 2009. "The Effect of Salary Caps in Professional Team Sports on Social Welfare," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-23, April.
    7. Stefan Szymanski, 2010. "The Economic Design of Sporting Contests," Palgrave Macmillan Books, in: The Comparative Economics of Sport, chapter 1, pages 1-78, Palgrave Macmillan.
    8. Daniel R. Marburger, 1997. "Gate Revenue Sharing And Luxury Taxes In Professional Sports," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 114-123, April.
    9. Stefan Kesenne, 2000. "Revenue Sharing and Competitive Balance in Professional Team Sports," Journal of Sports Economics, , vol. 1(1), pages 56-65, February.
    10. Rodney Fort & James Quirk, 1995. "Cross-subsidization, Incentives, and Outcomes in Professional Team Sports Leagues," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1265-1299, September.
    11. repec:bla:scotjp:v:47:y:2000:i:4:p:364-98 is not listed on IDEAS
    12. repec:bla:scotjp:v:47:y:2000:i:4:p:422-30 is not listed on IDEAS
    13. Sloane, Peter J, 1971. "The Economics of Professional Football: The Football Club as a Utility Maximiser," Scottish Journal of Political Economy, Scottish Economic Society, vol. 18(2), pages 121-146, June.
    14. Brad R. Humphreys, 2002. "Alternative Measures of Competitive Balance in Sports Leagues," Journal of Sports Economics, , vol. 3(2), pages 133-148, May.
    15. Rodney Fort & James Quirk, 2004. "Owner Objectives and Competitive Balance," Journal of Sports Economics, , vol. 5(1), pages 20-32, February.
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    Cited by:

    1. Budzinski, Oliver, 2017. "Market-internal financial regulation in sports as an anticompetitive institution," Ilmenau Economics Discussion Papers 110, Ilmenau University of Technology, Institute of Economics.
    2. Martín González Eiras & Nikolaj A. Harmon & Martín Rossi, 2017. "Fundamentals and Optimal Institutions: The case of US sports leagues," Working Papers 128, Universidad de San Andres, Departamento de Economia, revised Jan 2017.

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    More about this item

    Keywords

    sports league; luxury tax; social welfare; competitive balance;
    All these keywords.

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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