Inter-league competition for talent vs. competitive balance¤

We analyze the distribution of broadcasting revenues by sports leagues. In the context of an isolated league, we show that when the teams engage in competitive bidding to attract talent, the league's optimal choice is full revenue sharing (resulting in full competitive balance) even if the revenues are independent of the level of balancedness. This result is overturned when the league has no monopsony power in the talent market. When the teams of several leagues bid for talent, the equilibrium level of revenue sharing is bounded away from the full sharing of revenues: leagues choose a performance-based reward scheme. Moreover, if the e®ect of competitive balance is su±ciently low on revenues, the unique equilibrium is a contest: the winner takes all. Our model provides an explanation for the observed di®erences in revenue sharing rules for national TV rights used by the U.S. sports leagues (full revenue sharing) and European football leagues (performance-based reward). ¤We embarked on this project when we were both at the Institut d'Anμalisi Econμomica (CSIC) in Barcelona. Palomino acknowledges ̄nancial support from the TMR network on \The Industrial Organization of Banking and Financial Markets in Europe." Corresponding author: J¶ozsef S¶akovics, Department of Economics, University of Edinburgh, 50 George Square, Edinburgh EH8 9JY. e-mail: [email protected]