Revenue Sharing in Professional Sports Leagues: for the Sake of Competitive Balance or as a Result of Monopsony

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 two di®erent leagues bid for talent, the equilibrium level of revenue sharing is bounded away from the full sharing of revenues: leagues choose a performancebased reward scheme. Finally, we argue that our model explains the observed ¤This project was initiated while Palomino was visiting IAE (CSIC). He thanks this institution for its hospitality and acknowledges ̄nancial support from the TMR network on \The Industrial Organization of Banking and Financial markets in Europe." Correspondence: Fr¶ed¶eric Palomino, CentER, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands. e-mail: [email protected], Fax: +31-13-4663066. Phone: +31-13-4663262. Home page: http://cwis.kub.nl/»few5/center/STAFF/palomino/.