Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35523
Authors: 
Feess, Eberhard
Gerfin, Michael
Muehlheusser, Gerd
Year of Publication: 
2008
Series/Report no.: 
IZA discussion papers 3834
Abstract: 
Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German Bundesliga, our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency.
Subjects: 
Strategic contracting
rent seeking
empirical contract theory
long-term contracts
breach of contract
sports economics
JEL: 
L14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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