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.
I suppose it would be nice if Arsenal could guarantee a purchase of 10 per cent of a win of the League Cup - given the sorry state of their trophy cabinet - let alone setting their sights on the Champions League and a place higher than fourth.
Good plug for the blog though.
His PR effort continues but he's just not credible. Taking lowlife journalists on an all expenses paid boozing and whoring trip to Moscow won't be forgotten by genuine Arsenal fans in a hurry....
Great article. Adds a little perspective. I think the entire debate over Arsenals financials is entirely inconsequential as Usmanov has muddied the news headlines to such a degree (obviously by paying large ones for a well placed article) that it is hard to know who to believe.
The BBC article that led me here could very well be an unbiased piece but the fact that he says he won't lend bias to any shareholder perspective as he is an Arsenal fan but then goes on to present the Uzbeks opinion as 'interesting' is, in itself, rather damning of the side he has taken.
Thanks for the article, awesome blog.
As for winning the League Cup, I suppose everyone needs their own discontinuous aspiration. It would be interesting to model the utility functions of the different tournaments for the fans of each team. I suspect they might roughly obey a logarithmic function of the difference between the team's self-image and its actual performance.
If Macclesfield were to win the League Cup it would be almost as good for them as winning the FA Cup or the Premiership (putting aside the minor logistical problems of the latter); while for a team like Arsenal that aspiration is much less satisfying.
Indeed I am sure that if Tottenham were to win the League Cup again this year it would provide much less satisfaction than last time. Ambitions are always upgraded until past achievements are forgotten.
as far as possible without surrender be on good terms with all persons.
How does that compare to Tottenham's?
They'd still love to be in our position, end of.
(Cesc, not this tripe)