Islj 2009 3-4 - TMC Asser Instituut

9 The ‘reserve clause’ gave club owners an
exclusive option to renew the annual contract
of initially eleven (and subsequently
all) players under contract to them. A
series of annual renewals could tie a player
to a club for the duration of his career
(Sandy et al., 2004). The reserve clause
only existed in the American team sports.
The reserve clause did not exist in
European football, but the system before
the Bosman-arrest almost looked the
same. Players could not switch for free to
another club, after the ending of their
contract. It means that the clubs could
keep the players for their entire career at a
club. So, the reserve clause existed in
European football in a different form.
10 It starts with a high bidding price and
the price is lowered until the willingness
to pay of one of the consumers is
reached. The bidding stops immediately
after the first bid. The winner’s curse can
be present in this type of auction.
11 This is the most common bidding
process. Consumers are bidding openly
against each other and the subsequent
bid is higher than the one before. When
no consumer wants to bid more than the
last bid, then the end of the auction is
reached. There is a smaller chance that
the winner’s curse is present in this type
of auction.
are paid below the marginal product of labor. When the monopsonistic
power of the clubs is decreasing, then the wage of the athletes will
increase. The term ‘monopsonistic power’ refers to a factor market
with few buyers (Sandy et al., 2004). The amount of power clubs have
depends on whether there is just one league or rival leagues. As discussed
by Kahn (2000), when there exist two rival leagues the salaries
of the players goes up in this period. It is not conclusive evidence of
a decrease in monopsonistic power, because there could be other reasons
for the rise of the salaries. Kahn (2000) also showed that, when
there is just one league the salaries are going down. He analyzed it in
the baseball league. He founds more evidence in other sports, which
suggests that with rival leagues there is less monopsonistic power for
the clubs. Since most sports do not have two rival leagues, this means
that there is potentially a high degree of monopsonistic power for the
clubs. The monopsonistic power of the clubs was even stronger when
the reserve clause 9 existed in most American sports. Under the reserve
clause players have to remain with the original team, unless the club
decided to trade or sell the athlete to another team. They never
became free agents, who could sell their services to other teams. In the
USA the change to free agency came in 1976. In Europe this change
came later. The Bosman-arrest in 1995 had a great impact on
European soccer. After the Bosman-arrest players could become free
agents, when the contract expired. This has lead to a decrease of
power of the clubs, because players at the end of the contract are free
to offer their services to every club. It has lead to more competition
between clubs in order to attract the free agents (Kahn, 2000). The
change was less intense than in the USA, because before the Bosmanarrest
the clubs has less monopsonistic power than the monopsonistic
power in the USA, during the reserve clause.
An economic rationale for the reserve clause is that it gives the
clubs incentives to invest in their players. For example, if the training
costs for young talents are high and the skills they learn are general
skills, then these skills can be used in every team active in that sport
and the skills are not specific for a team. With the free agency the
incentives for investing in the training of young talents fell drastically
(Rosen & Anderson, 2001).
Another important feature of this market could be the hold-up
problem. The hold-up problem exists between two parties, who have
to bargain with each other. The most efficient solution between the
two parties would be when they are cooperating with each other. But
the two parties are afraid to lose power in the bargaining process
between the two parties. When one of the parties loses power, then
the profits of the party will be reduced. Both parties have to invest in
the relation or to cooperate with each other to reach the efficient outcome.
In order to reach it, the parties have to work together.
The hold-up problem could also exist in the bargaining process
between club and player or between player and sports agent, when the
sports agent is representing a player. This could be the reason why
clubs can offer contracts with multiple years and a player cannot
break this contract. In this way, a club can invest in the relationship
between the player and club, because a player cannot leave the club
when he wants. In this way, the hold-up problem could be solved
between the club and the player, but it ends after a few years (the contract
length). Thereafter, a player is free to move every club he wants,
because there is free agency. So, the hold-up problem could still exist
for a small part in the labor market of players.
In the next chapter, some important features came up about professional
team sports, like the existence of rival leagues or the reserve
clause/free agency. The two features had an impact on the amount of
monopsony power of the clubs. Another feature that came up was the
hold-up problem, which exists in the labor market of players. When
the clubs have more power in the relationship between the player and
the club, then there is not a high need for sports agents. The players
were getting more bargaining power by the abolition of the reserve
clause system in the USA or after the landmark case of the Bosmanarrest
in Europe. To recoup all the possible benefits, a sports agent can
help the player. As been explained before, sports agents have more
knowledge of the market and they are more experienced in the bargaining
process. They are able to bargain a better salary for the athlete,
which would not be reached when he was not using a sports
agent. The abolition of the reserve clause increased the demand for
sports agents, but the existence of one league (and not two rival
leagues) will decrease the demand for sports agents. The increase of
the abolition of the reserve clause is far greater than the effect of rival
leagues.
2.2.3. Winner’s curse
Another possible economic reason of the high salaries of the players is
the winner’s curse. High salaries do not have to be bad by definition,
because a player can earn a high wage through the scarcity rents discussed
earlier. In practice, you can argue that most of the players are
paid more than the marginal product of labor.
The winner’s curse is a phenomenon from the bidding theory. It
depends on the kind of auction that is used. There are several types of
auction available: the Dutch auction 10 , the English auction 11 and the
sealed bid auction. The sealed-bid auction is the best example to
explain the winner’s curse. Everyone has to make a bid and the bid is
only known by the bidder himself. This leads to information asymmetry
between the different buyers. The one with the highest bid
wins the bidding process, but the difference between the highest bid
and the second-best offer is known as the winner’s curse. If the offer
of the highest bidder was one euro more than the second highest bidder,
he would also win the auction.
The bidding process in contracting athletes is not a sealed-bid auction,
but for clubs it is hard to determine the value of a player and to
know what other teams are willing to pay for the player (second-best
offer). So, the bidding process have some features of the sealed-bid
auction, like the information asymmetry between clubs. They do not
know what others are willing to offer. The best solution is, when the
highest offer is one euro above the second-best offer. The chance that
the team who contracts a free agent is overestimating his marginal
product of labor is bigger, then that a team is able to contract the free
agent who is underestimating his marginal product of labor (Quirk &
Fort, 1992).
The sports agents also benefit from the winner’s curse. They are
paid by a commission of the salary or signing fee of the player. When
the clubs are paying a winner’s curse, the sports agents also receive a
higher commission. The winner’s curse makes this profession even
more attractive than it already was, because there are large amounts of
money going to sports agents as rewards for their services. It will lead
to more sports agents, who offer their services to athletes. In the next
chapter, the need for sports agents will be explained.
So, the discussion of the winner’s curse leads to the conclusion that
the chance that clubs are contracting free agents for a higher salary
than the marginal product of labor is bigger. It also leads to larger
rewards of sports agents.
2.2.4. The need for sports agents
As discussed in this chapter, the power of clubs in the bargaining
process is very large. Over time, there have been some changes in regulation,
think of the free agency, which increased the power of players.
Or the power of clubs has been decreased, because the regulations
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