The economics of Arsenal
Robert Peston highlights a nice, rather knotty, little economics problem for Arsenal Football Club.
This conundrum highlights a number of areas of economic theory:
- Generalised agency problem. The interests of the different stakeholders in the club all, potentially, conflict with each other. The fans want maximum money spent on good players so they have a chance of winning something for the first time in years. The management of the club want (I guess) stability and a profitable business, which probably means accepting a lower probability of sporting success. The different shareholders want different outcomes: Usmanov may want an equity issue because, with more cash available than the other shareholders, it would probably allow him to increase his stake. Other shareholders want to preserve their stake relative to him, so they are less keen on the increase in investment. The players and manager presumably want to be successful on the pitch, well-paid and - in Wenger's case - to have his talent-building strategy and ability recognised. The fact that all these interests differ makes it hard to achieve a stable structure where the interests of all stakeholders are served. A bit like the banking sector really.
- Behavioural economics. The article pointedly refers to whether Arsene Wenger feels that he is not being allowed enough money. The implication is that his belief that the club is pursuing the right strategy is in part self-fulfilling.
- Capital structures. The balance between debt and equity finance is a problem I've covered before in this blog. In theory they are equivalent, but in reality they bring a whole different set of concerns with them. Equity provides more flexibility - in this case allowing the directors to choose between spending money on players now and paying the shareholders lower dividends - while debt, in a predictable economy, allows the controlling shareholders to increase their leverage and thus their short-term returns, at the cost of giving up some of their options.
- Time inconsistency. Would you rather spend the club's money on buying players this year - even if that means selling some assets with good long-term returns - or accept a lower chance of winning the league for the next couple of years and preserve more financial firepower for the future?
- Discontinuous or non-marginal consumption and utility. Football clubs are a notable case of a class of problems which do not obey the convenient assumptions of microeconomic utility theory. In general, it's much easier to analyse a situation if consumers have access to as much or little of a good as they want - for instance you can adjust your annual consumption of Coca-Cola pretty much to whatever level you like, and the utility you gain from it is likely to be a smoothly increasing function of the amount you consume, with the marginal utility diminishing as the quantity increases (a convex utility function). However the utility of winning the Champion's League is very different. We have seen how much money Roman Abramovich is willing to spend to win it, but we might reasonably guess that once he has achieved it once, his utility will drop off sharply. Perhaps if he could guarantee to purchase 10% of a win he might do so, but there is no mechanism to permit this. This makes the economic analysis of the behaviour of football club owners - and fans - much more difficult than typical consumer preference analysis.
Tottenham fans are no doubt relieved to be spared most of these dilemmas. The discontinuity of utility is much diminished when the choice is between 11th and 17th place in the league table.