Regulation in the market of sports agents. Or no regulation at all?

• Author: Smienk, Mark
• Position: ARTICLES

1. Introduction

   There is an actual debate going on, what to do with the profession of sports agents. Recently, the Voetbal International (1) published an article about the profession of sports agents. (2) The article said that all regulations applicable to the sports agent will be eliminated. The license, which is in place now, will be withdrawn. The clubs are not obliged to pay money to the sports agent anymore, the players have to pay it. It is not officially published by the 'Federation Internationale de Football Association' (FIFA), but some people confirms that this will be the new step against the corrupt sports agents. The sports agents will go in a free market and everyone can enter it without any education. In the light of this debate, it is interesting to see what regulations are in place and what the implications these regulations give. It is not sure, whether the FIFA really is going to do this, but it will lead to a heavily debate between sports agents, clubs, players and the FIFA.

   The last decades, the industry of sports agents has emerged tremendously, especially in the United States of America (USA). Before, athletes and clubs were not negotiating very often over their contract. All the athletes could only negotiate with one club and if they want to play they had to accept it (Wilde, 1992). The clubs had a lot of power in the old situation. This is called a monopsonistic market, there exist a single buyer. The single buyer is the club or the owners of the club, because sports owners are a small and interconnected group and they group together and act as monopsonists (Kahn, 2000). The reserve clause created such a market for the participants, the reserve clause was created by the sports organizations. It meant that most players stayed with one club during their career.

   When the reserve clause did not exist anymore, the athletes were free to negotiate with other clubs at end of the contract. At the same time, the professionalizing of sports all over the world contributed to higher salaries and more transfers of athletes. It has lead to a multi-billion industry (Wilde, 1992).

   These two developments have lead to more power for the athletes in the USA. As explained in Rosen (1981), the connection between personal reward of an individual and the size of the market is closely connected. So, the evolution of professional sports to a multi-billion euro industry is an important aspect of the increase of the salaries.

   The paragraph above is about the USA, but the situation in Europe is a little bit different. There are some similarities and some differences. First and probably most important difference is the reserve clause, because it never existed in Europe. When we discuss Europe, the main focus will be on European football. In European football, there was a major change after the Bosman-arrest in 1995, but it was almost the same as the reserve clause. So, in Europe there was monop-sonistic power for the clubs, but not as much as it was in the USA. That is the reason why we should read all the articles and literature from the USA with caution, because it cannot be translated totally to Europe. I will discuss more of the differences between the USA and Europe, in chapter 1.2. The Bosman-arrest in European football also created a new system, which was that the players became free agents, when the contract expired. The professionalizing of sports was also present in Europe and it came at the same time as the Bosman-arrest, roughly. The Bosman-arrest and the professionalizing of sports have also lead to multi-billion euro industry in Europe. So, in Europe the Bosman-arrest and the professionalizing of sports leads to the higher salaries of players and also leads to more power of the players in comparison with the clubs.

   The changing labor market for players (3) has lead to the creation of a new market: the market for sports agents. I will discuss the labor market for players more extensively, in chapter 2.2. A sports agent is negotiating on behalf of a player with the club and they receive a commission for the service.

   Nowadays, the sports agents are part of the professional sport culture. They have a significant power in the market, some people even say that they have too much power. In such a way, that they can influence the migration flows, transfer fees and wages in the way they want it. It used to be a two-sided relationship between a player and a club. Today, the sports agent is the third actor in the market.

   So, the two-sided relationship evolved over time towards a three-way relationship, consisting of the clubs, players and the sports agents.

   There is a principal-agent problem in the three-way relationship, because the sports agent is negotiating on the behalf of the athlete. The third party is not involved in the traditional principal agent problem, but we have to keep the clubs in mind. They can influence the principal-agent relationship between the player and his sports agent, by aligning the interests of the clubs more with the sports agents. The athlete and sports agent have a conflict of interest and there is information asymmetry, because every actor is trying to maximize his own profits. A sports agent has more knowhow of the market and he has more experience in the bargaining process. For the athlete, it is important to give the right incentives to the sports agent in order to align the interest of the sports agent and the athlete. If a sports agent is negotiating a contract in the interest of the player, then this can be seen as bargaining at arm's length (Bebchuk and Fried, 2004). The principal-agent problem and the bargaining at arm's length will be discussed in respectively chapter 2.3 and chapter 2.4.

   Authorities or private institutions have to set some regulations in order to constrain the power of a sports agent and the ability to abuse a player (Sobel, 1987). Without any regulation, the power of a sports agent or a group of sports agents might become too strong. Nowadays, there are regulations in the market of sports agents. A good example is the license, which is needed to be a sports agent in most sports. If the requirements for such a license are high, the quality of the sports agent increases.

   Furthermore, there is not much research available in the field of sports agents in Europe, in contrast with the United States of America. The literature about the sports agents in USA is extensive and it can be used for sports agents in Europe, but there is still not a clear guideline how to regulate the market for sports agents.

   1.1. Problem statement

   In this research, the focus will be on the regulation in the market of sports agents. When thinking about the regulation in the market of sports agents, several questions arise. Why is there a need for the market for sports agents to be regulated? More specifically, which problems or market failures arise in an unregulated market for sports agents? Can these problems be solved by regulation, and if so, how?

   What can be learned from regulation of the market for sports agents in the USA for Europe and in particular the Netherlands? In order to narrow the research, the following problem statement is formulated:

   "How does the market for sports agents in football look like in the Netherlands and is the regulation in place enough to create an efficient market?" In order to answer the research question it is necessary to set up some sub questions. The first would be: What does the academic literature say about the market of sports agents and what economic theories are useful for this market? The second question is: What regulations are in place in the market of sports agents in the Netherlands? After that, the question arises: How does the market of sports agents looks like in the Netherlands? Finally: What experiences do the actors in the market have with the different regulations in place?

   So, I will first start with a theoretical framework of economic theories. In order to understand the market for sports agents, it is good to explain shortly how the labor market for players works. Further examples of theories are moral hazard, adverse selection, principal-agent problem and more. After that, there will be a short review of the literature on this topic. At this moment, there is not yet a clear overview of the market for sports agents in the Netherlands. So, after the literature discussion I will give the view of different actors on the market. In order to this, I have done interviews as an empirical study. The actors are the clubs, sports agents and the players. The focus in the research will be on Dutch football. At last, there will be a conclusion, with the findings of this study.

   1.2. Differences between USA and Europe

   In this chapter, some of the important differences and similarities of USA sports and European sports will be discussed. It is important to know the differences, because the most of the academic literature is from the USA.

   First, it is important to know which sports are called USA sports or European sports. In the USA there are four main sports, which are played on a great scale throughout USA. The four sports are Ice hockey, Basketball, Baseball and American Football. (4) In Europe, there is one sport throughout the continent, which is very popular. This sport is football or like the English people prefer to say it, it is soccer. In this research, I will use the name football.

   In the leagues in USA there are closed leagues, which are not in place in Europe. This means that a club cannot relegate to a lower level. The implication is that the competition at the bottom of the league is not very exciting. In Europe there are open leagues. It is different in every country until which level. In the Netherlands, for the first season, the league became an open league. (5) The clubs in the second highest level can relegate to a lower league. To determine the champion in the USA, the clubs have to play playoffs at the...