Financial Fair Play and Financial Crises in European Football Thomas PeetersStefan Szymanski University of AntwerpUniversity of Michigan Research Foundation Flanders (FWO) Preliminary version of a paper prepared for the 58 th panel meeting of Economic Policy, October 2013

Football finance Revenues and profits in English football, in million £.

Football finance Wages and wage to turnover ratio in English football, in million £.

Financial Fair Play (FFP) Financial regulation: part of licensing agreement avoid insolvencies – no negative equity – no overdues payable – no auditor qualification break-even rule – football-related income > football-related costs – prohibits “sugar daddy” financing

Financial Fair Play (FFP) UEFA : European level national member associations represents all stakeholders of European football organizes inter-league competition: – Champions League – Europa League  Regulator + competition organizer not horizontal agreement >< salary caps

This presentation Can breakeven function as a coordination device and shift rents from players to owners? – effect on competition in national league: impact on wage bills impact on revenues impact on sports performance – mimic horizontal coordination (salary cap)  Simulate FFP for England, Spain, Italy, France

This presentation Can breakeven function as a coordination device and shift rents from players to owners? Our answer: yes. – wage expenditure declines: mildest regime: -€400m final regime: -€800m – revenues remain stable – top teams consolidate sporting success

Competition Policy and FFP “I fully support the objectives of UEFA’s Financial Fair-Play rules […] The UEFA rules will protect the interests of individual clubs and players, as well as football sector in Europe as a whole.”* Joaquin Almunia, European commissioner competition policy European Commission: – joint Statement 21 March 2012 focus on state aid rules model for other sports full approval *Retrieved from:

Competition Policy and FFP “Specifically, this complaint challenges the restrictions of competition caused by the “Break-even rule”. […] [It] generates the following restrictions of competition: – Restriction of investments – Fossilization of the existing market structure […] – Reduction of the number of transfers […] – Deflatory effect on the level of player’s salaries – Consequently, a deflatory effect on the revenues of player agents” Press release by Jean-Louis Dupont, lawyer to Daniel Striani, in his complaint to the EC

Outline Introduction Model Estimation Counterfactual Conclusion

Outline Introduction Model Estimation Counterfactual Conclusion

Model

Club behavior: – owner sets budget constraint: positive: profits flow to owner (e.g. Arsenal) negative: owner finances team (e.g. Man City, PSG) – manager maximizes points given: constraint productivity revenue generating capacity

Model Contest Function: payroll: division specific return: productivity:

Model Cobb Douglas revenue function: – points obtained: – tangible capital stock: – year-division dummy: – team-specific effect: Profit: – non-payroll cost:

Model Optimization problem: Maximize points subject to – owner budget constraint:  FOC:  solve for

Model FFP: increase  – direct effect: affected clubs reduce payroll – indirect effect: winning points cheaper revenues teams increase payrolls increase  bounded teams: result indeterminate  unbounded teams: increase spending

Outline Introduction Model Estimation Counterfactual Conclusion

Estimation Data: – England: , 1 st & 2 nd division – Spain: , 1 st division – Italy: , 1 st & 2 nd division – France: , 1 st & 2 nd division Variables – sports: match results, manager tenure – finance: wages, revenues, assets, profits/losses

Estimation FOC: – non-payroll costs: observable – equilibrium payroll: observable – budget constraint: observable – contest success function: estimate – revenue function: estimate

Estimation Contest Function: – unobserved productivity correlated with payroll  upward bias return parameter  productivity polynomial (Olley-Pakes) – manager tenure – tangible assets – feedback results to wage spending  two step estimator Vuong-Rivers (1988)  two-step ordered probit procedure

Outline Introduction Model Estimation Counterfactual Conclusion

Counterfactual Replace FOC: – 4 scenarios: = €15m/season = €10m/season = €5m/season = €5m/3 seasons – Calculate

Counterfactual Simulation 2010 EPL season: 1.adjust payroll of affected teams 2.calculate points total and revenues 3.adjust payroll to increase/decrease in revenues 4.recalculate points total and revenues  repeat until fixed point = new equilibrium bootstrap procedure using 200 independent parameter draws

Outline Introduction Model Estimation Counterfactual Conclusion

Breakeven rule: – rent-shifting mechanism – raises profitability – helps on-field performance top teams – protects UEFA Champions League revenues  Serves interests of consumers?  Survives antitrust scrutiny?

Thank you for your attention! Questions and comments more than welcome!