In this paper we develop an economic model
of a professional sports league, in which the teams acquire playing talent in
an external market. There have been several earlier formulations of this open
model and all rely upon an inappropriately specified revenue function. Team
revenues should depend upon the absolute quality of the teams, as well as their
relative quality measured by win-percent. An inference that has been cited
widely in this literature is that revenue sharing increases competitive
inequality. We show that this analysis is flawed. If the revenue function is
specified appropriately, gate revenue sharing always reduces competitive
inequality.
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