A Model of Promotion and Relegation in League Sports John Jasina Claflin University School of Business Kurt Rotthoff Seton Hall University Stillman School of Business Last working version, final version published in: Journal of Economics and Finance Volume 36, Issue 2, April, Pages 303-318 The final publication is available at www.springerlink.com: http://www.springerlink.com/content/f6862826t6w54663/?p=7684fbc045744b4ba122f29165ab4 eff&pi=26 Abstract Sports leagues in different parts of the world are set up in different ways, some as open leagues and some as closed leagues. It has been shown that spending on players is higher in open leagues (Szymanski and Ross 2000 and Szymanski and Valletti 2005). This paper extends these studies, finding that sports leagues that practice promotion and relegation will have unambiguously higher aggregate spending on player talent than closed leagues. This will lower profits in the open league, but increase fan welfare. John Jasina is can be contacted at:
[email protected], Claflin University, 400 Magnolia St., Orangeburg, SC 29115 and Kurt Rotthoff at:
[email protected], Seton Hall University, JH 621, 400 South Orange Ave, South Orange, NJ 07079. We would like to thank Skip Sauer, Mike Maloney, Curtis Simon, and Hillary Morgan for helpful comments. Any mistakes are ours. 1 1. Introduction Most North American sports leagues are closed leagues that operate with a fixed set of teams every season. This differs from other leagues throughout the world that have open leagues that practice promotion, or a team from a lower division being promoted to a higher league, and relegation, where the lowest teams of a given division are demoted to a lower division.