Sunday, 18 August 2013

Football economics part 1: transfer fees

This weekend is the start of the Premier League football season. Hooray! Or maybe not? As a football fan even I am becoming disenchanted by the role money plays in the game today, the effect it has on motivating or de-motivating players, and the contribution it makes to the financial instability of clubs of all sizes. So perhaps it is time we started asking if the economics of football can be redesigned, and we could start with that most topical of issues: transfer fees. 

The last few weeks have seen the sports pages of our national newspapers monopolized by speculation over the future of players like Luis Suarez, Cesc Fabregas, Gareth Bale and Wayne Rooney. Of particular interest has been the £40m clause in the contract of Luis Suarez which bares a certain similarity to the buy-out clauses that often feature in the contracts of players at European clubs. These clauses are supposed to represent the amount any other club would need to pay to acquire that player, except that the buy-out clause is hardly ever enforced, and when the player does move clubs it is usually for a much smaller fee. 

Of course the Suarez clause isn't technically a buyout clause, so at the time of writing Suarez is still a Liverpool player, and in theory there is nothing that any bidding club or Luis Suarez can do to change that situation. But as we have seen in the past, if the bid is large enough then the club will sell irrespective of the wishes of the player, and if the player demands a move strongly enough then he usually gets his wish irrespective of the wishes of his current club. The result is a system that suits no-one, that is opaque and arbitrary, and which appears vulnerable to external manipulation and corporate bullying. 

The current system is therefore clearly dis-functional. The contracts often appear to be meaningless, particularly to supporters who expect total loyalty of the player to the club and the contract. However those same supporters are less exercised when it comes to selling players that the club no longer wants. And when it comes to the players themselves there is an equal degree of hypocrisy. Players have temporary fixed-term employment contracts that they expect to be honoured in full if they suffer an injury, but which many try to break if they see a better opportunity elsewhere. 

So is there a better way for players to be exchanged between clubs? I think there is. As money is the facilitator of such actions then the answer must lie in the economics of the transfer process. At the centre of any transfer policy must be the market value of the player, or his marginal utility. It is fairly easy to calculate what this should be. It will be determined by the player's salary and his length of contract. At any given time an employee's wage is supposedly (in neoclassical theory) determined by the company's gain in net revenue that results from his employment. Therefore his annual value to the company is determined by his salary. His total value over time will be set by the expected duration of his working life at that club and his average annual salary over that time period. For a footballer his expected working life at his current salary is set by the length of his contract. Risk of injury, age and loss of form are all factored into the contract length. Therefore the total marginal utility of the player is set by his current salary multiplied by the time left on his contract. 

The advantage of this formula is that everyone would know where they stand. The player and his current club would know that if a rival club were to bid more than the product of the player's current salary and the remainder of his contract then the player can move. His current club would know that if they wish to ward off such rival bids then they must offer the player either a longer contract, or a higher salary. And everyone would know that the closer that a player gets to the end of his contract the less his transfer fee will be. In that sense this idea merely formalizes the situation that already operates in practice where players with only one or two years left on their contract start to see their transfer value decline. 

The net result of such a change would be that transfer fees would probably fall and players' wages probably rise, with the wages of the very top players being most affected. Whether that is good or bad depends on your perspective (I will deal with the question of clubs' income and player salaries in another post), but it would mean that transfers of players would be smoother with the player's current club being unable to block such moves with outrageous demands over transfer fees. (Is Gareth Bale really worth £100m, or Suarez worth more than £40m?) In return though, the selling club would be guaranteed a fair fee. It would also mean that the most valuable players would move to the teams where they would have the greatest marginal utility. But more importantly it would rid football of the current tug-of-love fiascos that are played out in the media between players and competing clubs, as well as the tapping up of players, and all the other mechanisms by which clubs, journalists and agents seek to unsettle players in order to force a move, often at below the market rate.

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