Working Paper Series, Paper No. 06-27 Revenue Sharing in Sports Leagues: The Effects on Talent Distribution and Competitive Balance Phillip Miller† November 2006 Abstract This paper uses a three-stage model of non-cooperative and cooperative bargaining in a free agent market to analyze the effect of revenue sharing on the decision of teams to sign a free agent. We argue that in all subgame perfect Nash equilibria, the team with the highest reservation price will get the player. We argue that revenue sharing will not alter the outcome of the game unless the proportion taken from high revenue teams is sufficiently high. We also argue that a revenue sharing system that rewards quality low-revenue teams can alter the outcome of the game while requiring a lower proportion to be taken from high revenue teams. We also argue that the revenue sharing systems can improve competitive balance by redistributing pivotal marginal players among teams. JEL Classification Codes: C7, J3, J4, L83 Keywords: competitive balance, revenue sharing, sports labor markets, free agency * I thank Dave Mandy, Peter Mueser, Ken Troske, Mike Podgursky, Jeff Owen, and two anonymous referees for valuable comments on earlier drafts. Their suggestions substantially improved the paper. Any remaining errors or omissions are my own. †Phillip A. Miller, Department of Economics, Morris Hall 150, Minnesota State University, Mankato, Mankato, MN 56001, E-mail:
[email protected], Phone: 507-389- 5248. 1. Introduction Free agency has been cheered by players and agents but has been scorned by team owners. Player salaries under free agency have expanded to an extent that many fans believe small market teams now have difficulty in competing for playing talent and on the playing field, worsening the competitive balance between teams.