Wednesday, December 21, 2011

Is the (European) Football Transfer Market Irrational?

The Financial Times has an interesting article questioning the rationality of the European football transfer market. For those not well versed in the European football transfer market - here is a simple version. (Let me know if I get this wrong).

In the (European) football labor market if a player in one league (such as the English Premier League) is to be moved to another league (such as the Spanish Primera Division), then the team acquiring the player (say Real Madrid) must pay (although in many cases the price is zero) the team (Manchester United) relinquishing the player in a different league. Then the player that has changed teams old contract is nullified and a new contract is drawn up.

In 2009, Real Madrid paid 80 million Euros to acquire the rights to Cristiano Ronaldo. This transfer payment is what is being questioned by the Financial Times. Notice in the article, that Stefan Syzmanski reports that a teams payroll by itself explains 92% of team performance, but that the transfer fees by itself can only explain 16% of team performance. UEFA warned that such transfer fees would deteriorate competitive balance, an argument I seriously doubt.

One way to think about this is that this is a two-part tariff (or two part pricing). The transfer fee then should not explain performance very much as it is designed to extract the teams surplus, which may very well be highly independent of the teams performance.

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