1. 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

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

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

4. 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

5. 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

6. 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

7. 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

8. 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: http://www.sportbusiness.com/news/185272/european-commission-endorses-uefa-s-ffp-plans

9. 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

10. Outline Introduction Model Estimation Counterfactual Conclusion

11. Outline Introduction Model Estimation Counterfactual Conclusion

12. Model

13. 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

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

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

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

17. 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

18. Outline Introduction Model Estimation Counterfactual Conclusion

19. Estimation Data: – England: 2000-2010, 1 st & 2 nd division – Spain: 1998-2011, 1 st division – Italy: 2002-2011, 1 st & 2 nd division – France: 2004-2011, 1 st & 2 nd division Variables – sports: match results, manager tenure – finance: wages, revenues, assets, profits/losses

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

21. 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

24. Outline Introduction Model Estimation Counterfactual Conclusion

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

26. 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

29. Outline Introduction Model Estimation Counterfactual Conclusion

30. 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?

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