Knowing and Making

Alan Sugar has belatedly discovered an important economic concept: the idea of incidence . The star of The Apprentice and former owner of Tottenham Hotspur has just realised that when new income pours into a competitive industry which relies on scarce resources, incumbent companies don't get to keep the money. The standard example of this in economics is farm subsidies. Although one might think farm subsidies are good for farmers, that is not really true. Because there's a fixed supply of farmland, whose price is determined by how much money a farmer can generate from it, all of the extra money is - eventually - captured by landlords in higher rents. Farmers might benefit in the short term, as this paper suggests , but when their leases are up for renewal the rent will go up. Football is no different - there's a limited number of talented players, and all the clubs want to buy them. So now that the Premier League makes £2 billion a year (twelve times the amount of 20...

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 hav...