World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data
The Promotion Test
Stefan Szymanski
World Economics, June 2002

The collapse of broadcaster ITV Digital owing £178m to the English Football League will cause, according to the League’s Chairman, the financial failure of up to fifty of the seventy two clubs. If this were to happen a major restructuring of English football would have to take place, including measures to make sure it could not happen again. This paper examines the underlying causes of the crisis and proposes a simple financial stability rule that would achieve this aim. The rule, which would deny promotion to any team spending over a fixed percentage (e.g. 70%) of its income on player wages, is designed to be a minimum intervention in the operation of the football market, which has in fact worked well until now. The paper argues that because (a) financial stability is in consumers’ interests, (b) the proposed rule involves minimal intervention, and (c) since competition between clubs would remain intense, the rule would not be subject to competition law challenge.
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