When the back pages of the Sunday newspapers suggest that Real Madrid have made an offer of €95m euros for Tottenham wide-man Gareth Bale, it reminds me of how odd the labour market for sports stars really is and how interesting it is to study.
The answer may appear easy but valuing the worth of sports stars is extremely difficult. First for the technical interpretation; Gareth Bale and other world class footballers are what economists call ‘inelastic in supply’. Economists would say that Gareth has an extremely high marginal productivity of labour (over the rest of us on the football pitch) and is the one who, if reports are anything to go by, would receive €10m a year for plying his trade with Real Madrid. To put this simply, there are very few players on the planet that have the ability of Gareth Bale.
Given his unique talents and the relentless pursuit of billionaire owners to win, we can begin to explain the
considerable valuations and wages of top footballers with the same logic economists use to explain anyone’s wage rate in the labour market. It’s a case of supply and demand; while there are plenty of economists to replace me in my
job, there are very few, if any, close substitutes for Bale.
Of course, the matter of valuation and the quoted €95m euros is more complex than this. Explaining figures like this one has a long history. Early attempts to understand the economics of sport and valuation were made in a seminal article by Simon Rottenberg in 1956 in the Journal of Political Economy and in the late 1960’s Peter Sloane became the first to address the transfer market from an institutional perspective. Since then the modelling of player valuation and the determining factors of an individual’s transfer fee has become of increasing interest to sports economists and ‘took off’ in the 1990’s with the growth of the English Premier League.
So what characteristics determine a footballer’s value?
Fiona Carmichael and Dennis Thomas attempted to answer this question in 1993 and used data from 214 transfer during the 1990-1991 English First Division League season. They found that the league position of both the buying and selling club were not statistically significant variables when determining a transfer fee. In 1997 this finding was corroborated by Alan Speight and Dennis Thomas who looked at 217 arbitrated settlements on disputed transfers. Further studies have found additional variables, which one would expect to be correlated to a player’s fee, not to be statistically significant. A surprising example being a player’s number of previous clubs (Reilly and Witt, 1995).
In 1999 and the early 2000’s the movement to understand valuation gained speed as a set of academics including Stephen Dobson and Bill Gerrard developed an approach that uses what are called bargaining models to address the topic of player valuation. To reduce this to its bare bones, a player’s valuation was thought to be a consequence of personal characteristics (age, international appearances etc.), the selling club characteristics, the buying club characteristics and time effects over multiple seasons. Dobson and Gerrard assessed the issue of valuation with the largest sample size to date; while free transfers were not included, a sample of 1350 players was compiled. Their work around this time implied that a club’s position in the previous season had little impact on a footballers transfer fee and that transfer valuations differ between transfer market segments.
The work in the late 90’s and early 2000’s really underlined how complicated the market for footballers was but others have tried to understand the market too – and the results of what determines a player’s value are quite mixed when other studies are considered. Indeed, contrasting evidence suggests that the consensus as to the precise determinants of a transfer fee is absent. Career matches’ played and international caps attained, two logical influences that one would expect to influence a transfer fee were found not to be statistically significant by Bernd Frick in his 2007 paper.
While rapidly evolving European football and the fact that player samples were taken from different European leagues may go some way to explaining the constantly changing characteristics that determine valuation, the puzzle
will probably remain to the completely solved when football is changing so quickly. Indicative of this are the
findings of Professor Frick and his colleagues that show variables accounting for the Bosman ruling to be significant, in addition to whether the buying club has qualified for Europe. The significance of the latter variable would further
suggest the evolving nature of European football and the growing importance of European competitions. Given the influx of foreign owners to the Premier League and known information concerning the vastness of their wealth, I would think, that a variable concerning an owner’s wealth would need to be added to any valuation model – are players transferred for a greater amount when negotiators know that financial resources are not a question for the buying club? Again such an addition would be testament to the evolving nature of the sport.
The bargaining models used entail certain assumptions that may be deemed problematic. In particular the movement toward free agency is likely to reduce clubs having monopoly rights over human capital (Carmichael and Thomas 1993). A further shortcoming of the model Dobson and Gerrard developed in 1999 is the assumption of equal rent shares from a transfer presupposed under a bargaining approach.
But is it very unlikely that the transfer market and valuation is an arbitrary process with some of the most important pieces of information unfortunately out of reach for those that study the market. The often undisclosed nature of transfer fees and the high propensity for clubs to loan players and use player plus cash deals has resulted in an increasingly intricate transfer system. Most importantly the length a player has left on his contract is in the most cases unknown. A player’s contractual status really is an essential ingredient in determining the likelihood of a transfer taking place and the agreed fee with those players nearing the end of their contract have a lower transfer value and greater probability of being transferred. Despite the vagaries of contracts status, anecdotal evidence presented throughout the media would suggest this to be the case.
While the ultimate cause of Gareth Bale’s €95m value is due to the rarity of his ability and the desire of wealthy men to win football matches, what makes up this price tag is a convoluted set of factors more likely than not including his contract length, his age (that gives him a sell on value) and probably his ‘superstar effect’.