Revenue sharing is a pervasive policy in professional sports leagues. While it is usually justified as promoting competitive balance, previous work has shown that it actually worsens balance in models where equilibrium outcomes are determined by contest success functions and when the league’s goal is to maximize aggregate revenue. This paper offers an alternative justification for revenue sharing in such settings—namely, to balance two offsetting externalities: the “rent-seeking externality” and the “spillover externality.” The first reflects the “race” to be first, and the second captures...Read more
