Pool revenue sharing, team investments, and competitive balance in professional sports: A theoretical analysis

Using a contest model of a professional sports league, we show that pool revenue sharing has a negative effect on total expenditure for player talent. There are ''moral hazard'' problems with lower revenue teams in that they may pocket the money they receive from the pool without increasing talent investments. Based on four alternative measures of competitive balance, we find that pool revenue sharing increases the variance of expected winning percentages for a match and thus reduces the degree of competition in the league. Policy recommendations that combine pool revenue sharing with the requirement of a minimum payroll on players are shown to be procompetitive.