Migrating Football Players, Transfer Fees and Migration Controls

3.3 The social optimum: the efficient allocation of players with lump-sum redistribution

If talents are allocated in the most efficient way, i.e., condition (2) holds, they will play in
the leagues where they generate the largest marginal profit. Obviously, this generates a
higher total welfare than the total welfare the market generates. If, however, lump-sum
redistributions are feasible between leagues, considerations of equity can play a larger
role in the allocation of talents. In particular, as can easily be derived, in this case the
profit per capita will be equalized by the FFI. Panel E shows the allocation of talents and
the total social welfare without (SW^NT) and with (SW^LT) lump-sum redistributions,
respectively. By allowing lump-sum redistributions social welfare increases above the
level when only talents are allocated. Interestingly, by showing more consideration for
the equity aspects, leading to transfers from the big league to the small league, more
talents can be allocated to the big league, compare the number of players, T₁ , in Panels D
and E, respectively. As a result, the market equilibrium and the social welfare optimum
will coincide in a larger number of cases (compare Panels A and E), but for the cases
where an interior solution occurs, the market still implies an oversupply of talents in the
big league.

3.4 Correcting the market allocation by transfer fees

Most football associations in the world are not able (or may be even not willing) to locate
players according to some social-welfare objective. Some regulations of players
movement exist, however. In European football stipulations existed as to the minimum
number of native players that had to play in each club. Moreover, the transfer fee system
that existed prior to the Bosman ruling by the Court of Justice also had the indirect effect
of regulating the number of players that were migrating to other leagues. Negotiated
transfer fees enabled the small leagues to limit the migration of players from their
leagues, or to get compensation for the welfare loss.

Of course, there was no guarantee that the transfer fees implied the optimal allocation.
The point of this subsection, however, is that, giving enough information about the
parameters of the leagues, the FFI is for each transaction able to determine the transfer
rate that maximizes social welfare.

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