Islj 2009 3-4 - TMC Asser Instituut

tions. There are two important features of athletes, which encourages
athletes to hire sports agents for investment advice and income management.
Firstly, the length of the career of an athlete is overall quite
short, compared with a normal career. Secondly, many athletes are
paid very well. For an athlete, it is not easy to make good decisions
about investments, because they do not have the knowledge. Income
management is needed, because most of the athletes find it difficult
budgeting their expenses over their whole life course. Many athletes
become very rich on a young age and they are not always aware of all
the different expenses. Since the third function is different from the
first two, it might be performed by a specialist.
The fourth function of sports agent is legal and tax counseling,
because the above functions have several legal and tax implications. It
makes sense, if the third and fourth function is performed by different
specialists.
Nowadays, another function can be added to the list, because athletes
sign deals with sports agents at a younger age. This means that
the sports agent is concerned about the education, health and progress
of the youth player under contract. The fifth function will lead to an
increase in monitoring by the sports agent. In this way, the relation
between the sports agent and the athlete will be more intensive.
Sometimes it is even called as ‘babysitting’ by sports agents (Shrop -
shire & Davis, 2008)
2.1.2. Conclusion
In this study we will focus on the sports agents who perform all the
functions for the player. Sports agents, who perform the five functions,
are the greater players in the market of sports agents and they
have a clear vision and goal as a sports agent. The third and fourth
functions can be outsourced to specialists. These companies of sports
agents are not those, who are looking for fast deals and money.
The first two functions of sports agents are the main reasons why
the market for sports agents exists.
For simplicity, it will be assumed that every athlete has one sports
agent who is negotiating the contract. So, a sports agent is the representative
of an athlete who negotiates on his behalf with the club to
bargain the best possible contract.
2.2. Labor market for players
In order to clarify what the role is of sports agents, it is necessary to
illustrate how the labor market for players works. Due to inefficiencies
in this market, there is a need for sports agents in the bargaining
process between the athletes and clubs. In this paragraph, the labor
market for players will be explained and it shall be pointed out where
the sports agents come in.
The fans of professional sports and the media are astonished, when
they hear about the salaries of several star athletes in different kinds of
sports. Whenever a football player, baseball star or race driver signs a
multi-year contract for several millions euro’s a year, the public is
thinking: why are these people earning such amounts of money?
Economists immediately recognize scarcity rents, because the supply
of star athletes consists of a few athletes. It automatically means that
the athletes have a powerful position in the bargaining process, which
results in the high salaries nowadays (Rosen & Sanderson, 2001). If
there are no scarcity rents, the wage would be driven down to the
opportunity costs of the athlete, which was the case before the free
agency (Quirk & Fort, 1999). The labor market for athletes has some
important elements, which are also present in normal labor markets.
For economists, the labor market for athletes is an interesting field for
applied economics, because there is a lot of information available of
the workers (athletes) and their production (goals, home runs, assists
and more) is known. It makes it easier to estimate the marginal product
of player, which is usually not possible for the normal labor market.
Still, there are some difficulties for clubs to determine the wage
of a player. In a perfect world, player salaries would reflect the value
of athletes to their teams. The high demand to professional sports is
leading to the high salaries of the athletes (Quirk & Fort, 1999).
In the economic discussion of the labor market in professional
sports, some aspects dominate in most academic literature. These topics
are: demand for labor, monopsonistic market and the winner’s
curse.
For convenience, the topics will be discussed in turn.
2.2.1. Demand of labor
The demand for labor is derived from the demand curve for the ultimate
goods and services, where the labor is used as an input.
Economics uses the marginal product of labor to determine, what a
specific worker has contributed to the service or good. The theory of
the marginal productivity theory relies on the assumption of profit
maximizing. This assumption is the basis of the model, because more
labor is employed up to the point that the last unit of labor adds as
much revenue to the firm as it costs the firm. So, the marginal product
of labor must equal the marginal cost of labor. If the last unit of
labor costs more to a firm than it brings in additional revenue, then a
firm would not hire the last unit of labor (Sandy, Sloane & Rosen -
traub, 2004).
One of the unique aspects of the labor market for athletes is the fact
that personal contributions are easily to observe. The marginal product
of a player can easily be assessed and this is an important input for
team owners to set the wage for a player. A lot of data is available on
the personal achievements of the players in games. By setting the
wages of players, the demand for the professional sport is also important,
as explained above. When the demand for the professional sport
increases, the athletes can expect to receive higher salaries. The competitive
balance measures the attractiveness of a certain competition.
With a higher competitive balance, costumers are willing to pay more
for the services (Groot, 2008, pp. 25-27).
‘If general managers really were perfect judges of talent, there
would be no need to play the league schedule to determine the
league champion - we’d simply award the title to the one with the
highest payroll.’ (Quirk & Fort, 1999, p. 85)
This quote says that there are difficulties in determining the talent of
athletes and subsequently the salary, because otherwise the salary
would exactly match the marginal product of labor. There are two
important difficulties in determining the marginal product. The first
difficulty is the presence of interdependence of athletes in team sports.
It is important that the players cooperate with each other and that
they make each other better, by knowing each other’s weaknesses and
strengths (Sandy et al., 2004). This makes it difficult to know the
marginal product of labor of one player of the team, because he could
be good in cooperating with other athletes. Secondly, clubs have
uncertainty over the future marginal product of labor of an athlete.
They could be injured or the skills can deteriorate or improve and
with a rookie the clubs do not know what to expect from these athletes.
The uncertainty of the future of a player makes it hard for club
to set the right wage for an athlete. The stats of an athlete are not providing
a certain marginal product of labor for the next season.
For a club, there are also high training costs in order to raise a
potential good player. The training a player receives is useful for every
club in the same sport. This leads to the chance that the player goes
to another club and the club who invested in the player does not
receive compensation. That is an economic rationale for long contracts,
because clubs need incentives to invest in their players. Clubs
also have difficulties to monitor their young players. It is hard for a
club, to monitor a young player outside the training field, if they do
so there are high costs involved.
Summarizing, the clubs face difficulties in the labor market
through the degree of uncertainty of future productivity, the high
training and monitoring costs and the high sensitivity of productivity
to cooperation between players within one team. In the next chapter,
the power of the clubs will be discussed (Sandy et al., 2004).
2.2.2. Monopsonistic market
The number of clubs at the highest level in a particular sport is small
and may form an interconnected group, which has the danger to lead
to some kind of power. In this case, it will lead to monopsonistic
power in the labor market of athletes. The result is that the athletes
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