RESEARCH AND REVIEWS Tournal of Sport Management, 1999, 13, 259-279 ‘© 1999 Human Kinetics Publishers, In. The Determination of Player Transfer Fees in English Professional Soccer Stephen Dobson University of Hull Bill Gerrard University of Leeds Unlike most major U.S. sport teams, it is common for professional soccer clubs around the world to trade players for cash. This article develops a model of the player-transfer market in soccer in which observed transfer fees are determined by player characteristics, selling-club characteristics, buying-club characteristics, and time effects. The model is based on data on 1,350 transfer fees in English professional soccer from June 1990 to August 1996. The esti- mated model is used to investigate the rate of inflation in transfer fees. In addition, the determination of transfer fees is considered within different seg- ments of the transfer market. It is found that the determination of transfer fees differs markedly among segments. In recent years the soccer industry in England has been in a growth phase. Gate attendances have risen, TV revenues have increased dramatically, and off-field merchandising operations have expanded. Several soccer clubs have floated them- selves successfully on the London Stock Exchange. The buoyancy of the soccer industry has been particularly reflected in the transfer market. Player trading in English professional soccer typically involves the payment of a transfer fee. These fees have risen dramatically in recent years, culminating in July 1996 with the move of Alan Shearer from Blackburn Rovers to Newcastle United for the UK record fee of £15 million ($24.8 million). The Shearer transfer fee was also the world record fee in soccer at the time, but it has since been surpassed by the fees paid for the two Brazilian stars Denilson (bought by the Spanish club Real Betis for £21.4 million in July 1997) and Ronaldo (bought by the Italian club Internazionale for £18 million in June 1997). Despite its high public profile, economists in the UK have undertaken rela- tively little analysis of the soccer industry. Until recently, the economic analysis of Stephen Dobson is with the School of Economic Studies, University of Hull, Hull, HU6 7RX, UK, and the Department of Economics, University of the West Indies, St. Au- gustine, Trinidad. Bill Gerrard is with the Leeds University Business School, University of Leeds, Leeds, LS2 93, UK.260 Dobson and Gerrard soccer was almost exclusively concerned with determinants of the demand for soccer (see, e.g., Bird, 1982; Dobson & Goddard, 1995). A key exception is the work of Sloane (1969), who analyzed the institutional arrangements affecting the operation of the transfer market. In a subsequent article, Sloane (1971) considered the soccer club as a utility-maximizing economic agent. However, despite Sloane's early recognition of the possibilities of a wide-ranging research agenda in the eco- nomics of soccer, it is only now that this research agenda is being actively pur- sued. In particular, both aspects of Sloane’s early work are now being developed. Szymanski and Smith (1997) and Dobson and Gerrard (1997) have developed a team performance-club profit (TP-CP) framework within which to formally model the economic behavior of soccer clubs. The operation of the transfer market has also become an active research topic in the UK. Carmichael and Thomas (1993) analyzed the transfer market as a Nash bargain. Dobson and Gerrard (1997) derived a model of transfer market be- havior from the TP-CP framework and developed a formal test to investigate whether transfer fees represent monopoly rents, Empirical evidence on the deter- mination of transfer fees in English professional soccer has been provided by Carmichael and Thomas; Reilly and Witt (1995); Dobson and Gerrard; Speight and Thomas (1997); and Carmichael, Forrest, and Simmons (1997). The objective of this article is twofold: (a) to review the existing theoretical and empirical literature on player-transfer markets and (b) to address two empiri- cal issues so far neglected in the literature, namely, the rate of inflation of transfer fees and the possible segmentation of the transfer market. The article is structured as follows. In the section entitled “The Transfer Market in the English Soccer League,” the structure and operation of the market are described. The next section, “The Economics of Player-Transfer Markets,” surveys the existing literature on the player-transfer market in team sports and its application to English soccer. Empirical evidence is presented and discussed in the following section, and the last section offers some conclusions and discusses the direction for future research, The Transfer Market in the English Soccer League Professional league soccer in England was established in 1888. From the outset, member clubs of the league have been restricted to fielding only players registered with the sport's governing bodies. A player’s registration can only be held by one club at any point in time. The movement of a player between clubs requires trans- ferring the player’s registration between the clubs. Typically, the transfer has in- volved paying a fee to the club holding the player’s registration. In 1891 the sport's authorities imposed restrictions on the movement of players between clubs. Any player wishing to move to another club had to make a transfer request. If the club holding the player's registration refused the request, the player had to remain with that club or leave the league. If the transfer request was granted, the player could move, provided that the club received a satisfactory fee. This “retain-and-transfer” system was a type of player-reservation system (akin to the reserve clause in U.S.‘Transfer Fees in English Professional Soccer 261 baseball) that gave the club exclusive rights to a player. In 1963, this transfer system was challenged in the English High Court by the Newcastle United player George Eastham. The court ruled in favor of Eastham, declaring the system to be “an unreasonable restraint of trade.” (For a fuller discussion of the retain-and-transfer system see Sloane, 1969.) From the 1963-64 season until the beginning of the 1977-78 season, each player’s contract specified that the player’s registration would be for an initial period (1 or 2 years) and an option period (at least equal to the initial period). If a club did not exercise its option, the player was free to move to another club, with no fee being charged. If a player was under contract he could only move if the club holding his registration received a fee. From the 1977-78 season the rules were further modified with the establish- ment of freedom of contract. Since then, a player has been able to negotiate a move to another club when his contract expires. As before, to “reserve” a player the holding club must offer terms at least as good as in the final year of the con- tract. If this is not done the player is allowed to move without a fee being paid. If the club offers terms at least as good as in the final year of the contract and these are rejected by the player, he can move to another club, providing the holding club receives a fee. If a fee cannot be agreed on between the clubs, it is set by an inde- pendent tribunal. When a player is still under contract, the transfer of his registra- tion must be negotiated by the two clubs themselves. ‘The operation of the transfer market throughout the European Union (EU) is currently undergoing considerable structural change in the light of the Bosman ruling by the European Court of Justice, announced on September 20, 1995. This ruling established free agency for out-of-contract players, with no transfer fee pay- able. Initially, free agency was applied to international transfers between clubs in different EU member states. Domestic free agency was introduced in England in the 1998-99 season, with transfer fees abolished for out-of-contract players over the age of 24 moving between clubs in the English leagues. The age restriction is an attempt to maintain sufficient incentives for clubs to invest in training young players. The stated objective of the retain-and-transfer system was to prevent the concentration of star players in the clubs with the greatest financial strength. How- ever, as with the reserve clause in baseball, another important, possibly dominant, motivation for the regulation of player transfers was to enhance the profitability of clubs by restricting the bargaining power of players. The degree of player mobility in English professional soccer is shown in Table 1, which charts the number of permanent and temporary transfers in the professional league over the period 1972-1996, Table 1 shows that there were just over 12,000 transfers during this period, 56% of which were permanent moves. Before the retain-and-transfer system was ended in 1977 there were, on average, 238 permanent transfers per season. Since the introduction of freedom of contract there have been an average of 294 permanent transfers per season, representing about 15% of the registered full-time professionals in English soccer. (The num- ber of registered players with the 92 professional league clubs in England has262 Dobson and Gerrard Table 1 Permanent and Temporary Transfers, English Soccer League, 1972-1996 Permanent ‘Temporary Perma- Close In Close In nent (% Seasons season season Total season season Total Totals of total) 1972/73-1974/75 261 503 764 37 401 438 = 1,202 64 1975/16-1977/78 190 476 666, 29 351 380 1,046 64 1978/79-1980/81 363 471 834 25 160 185 1,019 82 1981/82-1983/84 267 367 634 23 479 502 1,136 56 1984/85-1986/87 331 495 826 54 622 676 = 1,502 55 1987/88-1989/90 427 655 = 1,082 50 672 722 1,804 60 1990/91-1992/93 343. 492 835 7 840 911 1,746 48 1993/94-1995/96 410 673 «1,083, 124 1,375 1,499 2,582 42 Totals 2,592 4,132 6,724 413 4,900 5,313 12,037 56 Note. Data are from Rothmans Football Yearbook (various editions; Rollin & Rollin). remained relatively stable since the 1970s, at around 2,000, although the number declined temporarily to around 1,600 during the period of financial retrenchment in the sport in the early 1980s.) This modest increase of just under 25% in the amount of (permanent) transfer activity is statistically significant at the 5% level. This suggests that player transfers remain largely club-motivated. Player transfers can be interpreted as part of the club’s response to being away from its optimal position on the performance-profit frontier. The behavior of clubs that are net sellers of players is likely to reflect the need to raise revenue and reduce costs in order to meet certain financial obligations (e.g., satisfying a minimum profit con- straint). In contrast, clubs that are net buyers of players are likely to be motivated by the need to improve playing success, having already satisfied the profit constraint. Not all the permanent transfers listed in Table 1 involve the payment of a fee. Some are free transfers and some involve player exchanges. It is impossible to give an accurate picture of the proportion of permanent moves involving fees over this period because, for most of the seasons from the early 1970s to 1990, there has been no publicly available record of disclosed transfer fees. It is only recently that reporting transfer fees has become commonplace; for example, the Rothmans Foot- ball Yearbook (Rollin & Rollin) only provides a complete record of disclosed trans- fer fees from the 1990-91 season onward. It is this lack of a consistent time series that restricts the statistical analysis to the 1990s. The data reveal that in the six seasons played between 1990-91 and 1995-96 there were 1,918 permanent do- mestic transfers (i.e., excluding transfers involving foreign clubs), of which 1,350 (70%) involved the payment of a transfer fee.‘Transfer Fees in English Professional Soccer 263 The Economics of Player-Transfer Markets ‘Trading players between clubs is a feature of many team sports. Despite there being a large literature on the economics of team sport (especially in the United States), little work has been done on the formal modeling of transfer fees under a player-reservation system. This is mainly because of the infrequency of player cash sales in U.S. major league sports, particularly in recent years. Rottenberg (1956) briefly considered cash sales of players, arguing that profit-maximizing baseball clubs would agree to a transfer fee somewhere between an upper limit given by the capitalized value of the player to the buying club and a lower limit set by the capitalized value of the player to the selling club. However, Sloane (1969) pointed out that, if clubs are utility maximizers, Rottenberg’s result might not fol- low, because the capitalized value of the player to the buying club might not nec- essarily be higher than the value to the selling club. Most of the research into sporting labor markets since the mid-1950s has focused on the impact of restrictive controls such as the reserve clause in baseball. Two principal lines of research have developed: (a) the impact on the level and distribution of players’ salaries (e.g., Kahn, 1993; Scully, 1974, 1995; Somers & Quinton, 1982) and (b) the impact on the distribution of playing talent and the degree of competitive balance between teams (e.g., Daly & Moore, 1981; Fort & Quirk, 1995; Hunt & Lewis, 1976; Quirk & Fort, 1992). ‘The discussion of player transfers has usually occurred in the context of the impact of alternative institutional arrangements on the distribution of playing tal- ent. The effects of labor market controls on the league as a whole have been ana- lyzed by El Hodiri and Quirk (1971) and Quirk and El Hodiri (1974), who showed that the distribution of playing talent in a profit-maximizing league with no re- striction on player trades is the same under free agency as under a player-reserva- tion system. Under both regimes the movement of players is motivated by the maximization of marginal revenue products (i.e., the incremental contributions to team revenue from additional playing talent). As Quirk and El Hodiri have shown, this results in the same distribution of playing talent irrespective of whether club owners control player transfers or the players have freedom of movement. In both cases the distribution of playing talent is that which maximizes league revenues; the only difference is that under free agency it is the players who receive the rents associated with their services. Most of the empirical analyses carried out of the distribution of playing tal- ent since the introduction of free agency in the late 1970s support this “invariance proposition” (see, e.g., Fort & Quirk, 1995; Vrooman, 1995), although Krautmann and Oppenheimer (1994) and Hylan, Lage, and Treglia (1996) found evidence that the allocation of labor might be different under free agency. In the latter case, the authors found that veteran baseball pitchers (those with 7 or more years service in the major leagues) are less likely to move relative to their mobility in the pre-free- agency period. Relatively little research has been done on the transfer market in English professional soccer. All the studies have estimated similar econometric models of264 Dobson and Gerrard transfer fees, in which the variation in fees is explained by four sets of variables: the characteristics of players; the characteristics of the selling club; the character- istics of the buying club; and other control variables, particularly time effects such as monthly and league-season dummy variables. The first study of the transfer market in English soccer was undertaken by Carmichael and Thomas (1993). They analyzed the transfer market within a Nash bargaining framework but made no attempt to formally derive the empirical impli- cations of such a framework. In their estimated model, the relative bargaining strengths of the selling club and the buying club are determined by player charac- teristics, as well as the characteristics of the buying and selling clubs. Using a similar methodology, Reilly and Witt (1995) investigated the role played by race in determining transfer fees. They found no evidence of racial discrimination in the transfer market. The article by Carmichael, Forrest, and Simmons (1997) departed from the previously mentioned work by employing the Heckman two-step procedure to allow for sample selection bias. In the first step, a limited dependent-variable model of the proneness of a player to be transferred is estimated. In the second stage, a model of the level of transfer fees is estimated, incorporating a sample selection bias correction. The problem with this approach is that the proneness to be trans- ferred must be modeled excluding information about actual or potential buying clubs. For players who are transferred, the buying club is observed; the potential buyers of nontransferred players are not observed. The exclusion of information on the characteristics of the actual and potential buyers is likely to create a serious misspecification problem in the first stage of the analysis that is carried over into the transfer fee equation via the sample selection bias correction. Speight and Tho- mas (1997) analyzed the determination of transfer fees that were settled through the arbitration process for disputed fees. They suggested that fees are mainly de- termined by the player and club characteristics, rather than a compromise between the final offers of the buyer and seller. The cited studies provide evidence on the determination of transfer fees, but, with the exception of Speight and Thomas (1997), they suffer from a lack of rigor in the theoretical modeling of the transfer market. Here, we attempt to formally model the transfer market within the TP-CP framework. framework is simi- lar to that adopted by both Vrooman (1997) for his analysis of baseball and Szymanski and Smith (1997), who estimate a performance-profit frontier for En- glish soccer clubs, Szymanski and Smith argue that the transfer fee for a player is the outcome of a competitive process, so that the fee is established at the reserva- tion price of the selling club. Szymanski and Smith's proposition contrasts with the argument of Carmichael and Thomas (1993) that transfer fees are determined via a bargaining process. Szymanski and Smith can be interpreted as arguing that transfer fees are bid down to the selling club’s minimum acceptable fee (i.e., the reservation price), whereas Carmichael and Thomas contend that transfer fees lie somewhere between the selling club’s reservation price and the buying club's maximum bid price. These two hypotheses can be considered different views on the extent to which transfer fees involve monopoly (or monopsony) rents. MonopolyTransfer Fees in English Professional Soccer 265 rents are present when the selling club extracts a share of the nonnegative differen- tial between its reservation price and the buying club’s maximum bid price. Using the TP-CP model, it is possible to derive a formal test of a necessary condition for the presence of monopoly rents in transfer fees. The fundamental assumption derived from Sloane (1971) is that the soccer club is a utility maximizer subject to a financial constraint. The utility function of the soccer club is assumed to have two arguments: team performance and club profits. Given this general formulation of the objectives of the soccer club (in which profit maximization is a special case), it follows that the valuation of a player to a club depends on the expected impact of the player on team performance and club profits. In other words, the value of a player to the soccer club depends on his contribution to both the sporting and the financial performance of the club. Let us consider the transfer of player i from selling club k to buying club j. Defining V", as the valuation of player / to the jth buying club over the period of the contract, the valuation of the buying club is assumed to be determined by the expected change in the level of team performance, AQ, and the expected change in revenue, A;R,, to be derived from the acquisition of player 7, The buying-club valuation function represents the monetary value of the increase in utility from the expected improvement in team performance and revenue. The buying-club valua- tion function can be written formally as Vi, = VF, (M;0, R) qd) ‘The expected change in team performance depends on the observed quality of the player relative to existing team quality. The anticipated change in revenue depends on the increases in gate revenue and other soccer-related revenue expected to accrue from the improved team performance, as well as any expected non-performance- related revenue benefits from the star quality of the player. Given the buying club’s valuation function, the maximum price that the jth buying club is prepared to pay in order to acquire player i, 7¥,, is determined as follows: TEM AWS +P, @ where W, is the wage cost of the player during the contractual period and 5, is the signing-on fee paid to the player when the contract is agreed and 7°, is the ex- pected “end-of-contract” transfer fee (if applicable). All four components of the maximum bid price are present values at the time of the transfer. The maximum bid price of the buying club is the club’s valuation of the player, net of the pay- ments to the player (i.c., wages and a signing-on fee), and allows for expected proceeds from selling the player at the end of the contractual period (although the Bosman ruling means that clubs have to transfer the player before the contract legally expires if they wish to realize any sell-on value). Assuming the soccer club to be rational, the maximum bid price sets the upper limit for the observed transfer fee. (It should be noted that, unlike most North American team sports, there are no restrictions on the number of players that can be registered by English profes- sional soccer teams. If there are limits on the number of players on a team, the266 Dobson and Gerrard maximum bid price for a new player would be determined net of the incremental sporting and financial contribution of the player released.) The kth selling club’s valuation of player i depends on the expected differ- ence between current levels of team performance and club revenue and the posttransfer levels, A*Q, and A‘R,, respectively, over the remaining period of the current contract. Hence the selling-club valuation function can be written as VW, = VW, 4/Q, Af) @) If the selling club is a rational agent, its reservation price (or the minimum accept- able transfer fee) is the current net present value of a player to the club. The reser- vation price of player i for the kth selling club, 7°,, is defined as P= Vu Wt Ab, co where W,, is the present value of the wage costs for the remainder of the player's contract and AT*,, is the present value of the appreciation (or depreciation) in the expected transfer fee if the player is sold later in his contract. Hence, it follows that, if both the buying and selling club are rational eco- nomic agents, the observed transfer fee, T,, will lie somewhere between the upper limit, 7®,, and the lower limit, T’,, If the observed fee lies above the lower limit, transfer fees involve monopoly rents because the selling club is able to extract some of the excess of the buying club’s net valuation over the reservation price. Assuming for theoretical simplicity that the share of the rent, &, is deter- mined exogenously and remains constant for all transfers, it follows that the ob- served transfer fee is given by T= OT, +(1-O)T,, 79,2705 51 (5) The observed transfer fee is a weighted average of the buying club’s maximum bid price and the selling club’s reservation price. In order to transform equation (5) into an empirical model to be estimated, it is necessary to specify the observed determinants of 7°,, and 7", itis assumed that the buying club’s maximum bid price depends on a vector of player characteris- tics, P,, and a vector of buying-club characteristics, B,,. Similarly, the selling club’s reservation price is assumed to depend on a vector of player characteristics, P., and a vector of selling-club characteristics, S,,. Substituting these terms into equation (5) yields 7.=97",@,B,)+(.-8)T, ,S,) © ‘The test for monopoly rents suggested by Dobson and Gerrard (1997) can be derived from equation (6). If rents are not present (i.e., f = 0), it follows that ob- served transfer fees depend only on player and selling-club characteristics. If there are monopoly rents in the transfer market (i.¢., 0 < f <1), it follows that the ob- served transfer fees depend on player, selling-club, and buying-club characteris- tics. Hence, it follows that the test for monopoly rents in the transfer market is whether buying-club characteristics are jointly significant as determinants of ob- served transfer fees. The dependence of transfer fees on buying-club characteris- tics, however, is a necessary but not sufficient condition for the existence ofTransfer Fees in English Professional Soccer 267 monopoly rents. The dependence of transfer fees on buying-club characteristics might also occur when f = 0 as a consequence of the side constraint, 7*,, or the interdependence of player and buying-club characteristics. Assuming linearity, the basic specification of the empirical model of trans- fer fees is given by T,=0,+a,P,+0,8, +0,B, + 0,Z,+u, a where Z, represents the set of other control variables such as time effects and u, is a random error. Empirical Evidence Data ‘The data on the player transfer market in English professional soccer were ob- tained from the various annual editions of the Rothmans Football Yearbook (Rollin & Rollin), supplemented by the Electronic Telegraph on the Internet, which pro- vides a monthly report on transfer activity. From these two sources it was possible to compile a comprehensive database on transfers in English professional soccer from June 1, 1990, to August 31, 1996. The data period represents six complete seasons plus the close (i.e., nonplaying) season prior to the start of the 1996-97 playing season. The season is defined as the period from the end of one playing season to the end of the next playing season, approximately June | to May 31. The playing season commences in August. The data set contains 1,350 transfers between two English professional soc- cer clubs. Only permanent transfers with a disclosed fee are included. In addition, the data set only includes British players with complete careers in either the En- glish or the Scottish professional league. The data set covers 60.9% of the total of 2,215 permanent transfers involving an English professional soccer club during the sample period. For permanent transfers with disclosed fees, the coverage is 93.2%. ‘The data set uses information on players and clubs available in a plethora of soccer statistical publications (e.g., Rothmans Football Yearbook, Rollin & Rollin; News of the World Football Annual, Brown; Soccer Who's Who, Rollin). However, it does not include information on players’ remuneration and length of contract, because the details of players’ contracts are not normally disclosed. The lack of information on the length of players’ contracts is a major problem because of the Bosman ruling. From the 1996-97 season onward, the expiration date of a player's contract is likely to have become a key determinant of a transfer fee, especially for players within 12 months of becoming free agents. It is not possible to identify players who are nearly free agents and for whom it is likely that clubs would be prepared to accept lower transfer fees. This problem is avoided by terminating the sample period in August 1996. The lack of publicly available information on play- ers’ salaries could also create estimation problems if the players’ labor market is, balkanized. There is good reason to believe that this is not the case, however. The extensive system of player agents ensures that there is an effective flow of private information on player salaries within the industry so that equivalent players in268 Dobson and Gerrard equivalent clubs will likely receive similar remuneration packages. Hence, it seems reasonable to conclude that the lack of salary data is unlikely to bias the results. The Basic Econometric Model of Transfer Fees ‘The dependent variable, LREALFEE, is the natural logarithm of the real transfer fee, measured in June 1990 prices. The nominal transfer fee, FEE, is deflated by the monthly retail price index for entertainment and other leisure goods. This price index, supplemented by league-season dummy variables, is used as the best avail- able proxy for the soccer industry's own price index. Data constraints (ie., partial availability of gate-price data and nondi prevent the construction of a more specific price index for soccer. A log specifica- tion is used to produce homoskedasticity (i.e., constant variance in the error pro- cess) in the estimated model. As we mentioned, previous empirical work suggests that relative transfer fees depend on four sets of explanatory variables: the player’s characteristics (P), the selling club’s characteristics (S,.), the buying club's characteristics (B,), and other control variables (Z,), such as time effects if the data set covers more than one season. The basic information set on player characteristics includes career/ experience information such as age, number of previous clubs, career league ap- pearances, career league scoring rate and international recognition, current form measured by league appearances and goals scored in the previous season, and positional dummy variables. The information on the selling club includes divi- sional status, league position, goal difference, and average gate attendance in league matches. Similar information is used for the buying club. In addition, a variable has been constructed to allow for the effect of the March transfer deadline (after which players are not eligible to play for their new clubs until the next season) on the behavior of buying clubs that are competing to win the league, gain promotion, or avoid relegation. The other control variables included are time effects in the form of monthly and league-season dummy variables. The definitions of the vari- ables used in the basic empirical model and the expected signs are detailed in Appendix 1. Statistically significant quadratic terms have been included to allow for nonlinear effects. The estimates of the basic empirical model are presented in Appendix 2. The summary statistics for the estimated model are as follows: Goodness-of-fit statistics Coefficient of determination, R° = 0.7905 Joint significance of explanatory variables, FP, S,,,.B,, Z,) = 67.924** Joint significance of buying-club characteristics, FUB,) = 59.544** Standard error of regression, SE = 0.669 Sample size, N = 1,350 Diagnostic test statistics Adjusted Bera—Jarque test for normality, x2,, = 38.784** White’s test for heteroskedasticity, F.,,,,, = 1.124 wareTransfer Fees in English Professional Soccer 269 Ramsey RESET test for model misspecification, F,,..; = 2.576 Chow test for parameter constancy between league seasons, F, ‘cuow = 0.963 **p <.01 (one-tailed test) The estimated model explains just over 79% of the variation in real transfer fees. This implies that there is a considerable degree of systematic variation in the trans- fer fees. The observed transfer fees for players traded between soccer clubs largely reflect relative differences in the observed characteristics of the players and the buying and selling clubs. In a statistical sense, the transfer market is highly ratio- nal, The estimated model also shows evidence of the possible existence of mo- nopoly rents in transfer fees. The buying club’s characteristics are jointly highly significant as determinants of transfer fees. Hence, the empirical evidence is consis- tent with observed transfer fees exceeding the reservation price of the selling club. ‘The estimated model provides a congruent representation of the data-generating process. The diagnostic test statistics for heteroskedasticity, model misspecification, and structural instability over time are insignificant. The only significant diagnostic test statistic is that for nonnormality in the residuals, caused by a very small num- ber of outliers with very low transfer fees that are more appropriately defined as nominal fees. The Inflation Rate of Transfer Fees Previous studies of soccer transfer fees have only used data for a single season and thus have not considered how fast the average level of transfer fees is growing across seasons. The data set for the current study covers six complete seasons, allowing investigation of the inflation rate of transfer fees. Between the 1990-91 and 1996-97 close seasons, the mean (nominal) transfer fee in the sample rose by an annual average of 25.3%. However, this figure overstates the underlying infla- tion rate in transfer fees for two reasons. First, the distribution of transfer fees is highly skewed in the upper tail, implying that the mean transfer fee is misleading as a representation of the sample as a whole. This problem can be overcome by using the mean of the natural logarithm of transfer fees (because the distribution of transfer fees tends to be approximately lognormal). This transformation yields an average annual rate of inflation of 19.4%. The second problem in determining the underlying rate of transfer inflation is that the average inflation rate will be affected by any change in the mix of play- ers being transferred. In particular, there has been a tendency over the sample period for proportionately more transfers of “higher quality” players, which has tended to increase the average rate of inflation. The basic econometric model of soccer transfer fees can be used to control for the changing mix of players being transferred to yield a “quality-adjusted” transfer inflation rate. For the sample pe- riod this inflation rate is estimated to have averaged 11.6% annually. Quality-adjusted transfer inflation rates can be calculated for different cat- egories of transfers. Table 2 presents quality-adjusted transfer inflation rates for transfers categorized by the age of the player, the divisional status of the buying club, and the international experience of the player. It can be seen that the underlying270 Dobson and Gerrard Table 2 Quality-Adjusted Transfer Inflation Rates, Selected Categories, 1990/91-1996/97 Average annual quality-adjusted Transfer category transfer inflation rate All transfers 11.6% Age ‘Under 24 1.1% 24-28 13.1% Over 28 11.1% Divisional Status of Buyer Premier league 178% Division | 16.9% Division 2 8.6% Division 3 6.7% International Experience Full international 19.1% Under-21 international 13.8% None 10.5% transfer inflation rate has been highest for three groups of players: midcareer play- ers (i.e., age 24-28), players bought by clubs in the top two divisions, and players with international experience. The lower inflation rates for players with no international experience and those bought by clubs in the lowest two divisions reflect the more competitive conditions in these segments of the players’ labor market. Although well exceeding the inflation rate of 7.9% in the UK entertainment and leisure industry over the same period, the transfer inflation rate is consistent with the financial conditions in English professional soccer. Average gate prices have risen annually by 14.4% on average between the 1989-90 and 1994-95 seasons (source: Digest of Football Statistics, Williams). TV revenues have also grown at an average rate of 18.7% over the period 1988-89 to 1996-97 (source: News of the World Football Annual, Brown). Overall, the total turnover of the English professional soccer Clubs has risen at an average annual rate of 20.3% between 1992- 93 and 1996-97 (source: Deloitte & Touche Annual Review of Football Finance, Boon). ‘The recent transfer-fee inflation rate is also in line with the historical rate of increase. Total transfer expenditure in English professional soccer has increased from £5.81 million in the 1972-73 season to £109.9 million in the 1994-95 season (source: Digest of Football Statistics, Williams). This represents an average an- nual increase of 14.3%. After adjusting for changes in the total number of players transferred, the average annual increase over the period is 12.5%. Segmentation in the Transfer Market The evidence we have presented on differences in the quality-adjusted transfer inflation rate across different types of player transfers suggests that it might be more appropriate to treat the transfer market as segmented. There might be veryTransfer Fees in English Professional Soccer 2” different causal mechanisms operating in different segments of the transfer mar- ket. Transfers of star players usually involve competitive bidding between the largest buying clubs. This segment of the transfer market is likely to be relatively “thin,” with a restricted supply of high-quality playing talent and only a few potential buyers. As a consequence, transfer fees can be expected to represent substantial monopoly rents to the selling clubs. Elsewhere in the transfer market, particularly in the lower divisions, players from outside professional-league soccer can repre- sent an effective alternative supply of playing talent, creating a “thick” market with many buyers and little scope for selling clubs to earn monopoly rents. (See Carmichael & Thomas, 1993, for a more detailed discussion of the transfer market in terms of bargaining theory.) The segmentation of the transfer market is investigated using two criteria: divisional status and direction of transfer. Divisional status is categorized as either top division or lower divisions. Top-division transfers are defined as those involv- ing either a selling club and/or a buying club in the top division (i.e., Division 1 until May 31, 1992, Premier League thereafter); the remaining transfers are de- fined as lower division transfers. The direction of transfers is categorized as either horizontal, upward, or downward. Horizontal transfers are defined as transfers between two clubs in the same division. Upward (downward) transfers are defined as transfers in which the player moves to a buying club in a higher (lower) division than that of the selling club. Using divisional status and direction of transfer gen- erates six segments in the transfer market. The characteristics of the players in each segment of the transfer market are markedly different. Table 3 presents mean values for selected player characteris- tics by market segment. The higher quality of the players involved in top-division transfers is reflected by the higher average transfer fee and the higher average Table 3. Mean Values, Selected Player Characteristics, by Market Segment Divisional status: Top Division Lower Divisions Direction of transfer: Horizontal Upward Downward Horizontal = Upward.» Downward FEE 1,303,272.3 663,932.2.-273.669.4 203,409.9 6,9905.8 AGE. 26.96 245 26.21 26.62 25.83 LEAGTOT 219.17 161.23 160.93 187.29 164.36 143.15 LEAG 26.10 30.62 15.12 7.43 32.39 18.14 GOALS 3.98 5.07 19s 4.10 254 GOALRATE 0.154 0.134 0.118 o.141 0.126 FULLCAPS: 5.48 13 155 052 0.18 UZICAPS 257 0.86 0.68 0.33 0.06 n 191 214 m2 305 191 207 Note. See Appendix 1 for definitions of variables.272 Dobson and Gerrard level of international experience. Players involved in upward transfers are typi- cally younger and less experienced but have better records of league appearances and goal scoring in the previous season, They also typically have more Under-21 international experience than players making downward transfers. This suggests that players moving to higher divisions are typically young potential “stars” with good current form. These young potential stars are bought to replace older players with poorer current form who are considered “surplus to requirements” and who move either horizontally or downward. The basic econometric model of transfer fees was estimated for each market segment. A summary of the estimated models is provided in Table 4. It is clear from Table 4 that the determination of transfer fees differs considerably across the six market segments. Generally, more of the player characteristics are statistically significant in top-division transfers. In this respect the greatest contrast is between downward transfers in the top division and tho: the lower divisions. In the case of players being transferred from the top division to the lower divisions, 6 of the 10 player characteristics are statistically significant determinants of the transfer fees, However, in the case of players moving downward in the lower divisions, the age of the player is the only statistically significant player characteristic. It is note- worthy that neither a player’s current nor career goal-scoring record emerges as statistically significant in the determination of transfer fees involving buying and selling clubs in the lower divisions. It should also be noted that the number of Under-21 international appearances is the only player characteristic that is insig- nificant in all six market segments but significant across the transfer market as a whole. This suggests that Under-21 caps is a segmentation variable rather than a determinant of intrasegment transfer fees. The goodness of fit of the estimated models tends to be higher for the top-division segments. It is also found that the evidence is consistent with monopoly rents occurring in all six segments; that is, the buying-club characteristics are jointly significant determinants of transfer fees for each type of transfer. Conclusions This article has provided a review of the existing theoretical and empirical literature on the determination of transfer fees in English professional soccer. The theoreti- cal framework of the TP-CP model was used to derive a model in which observed transfer fees are determined by player, selling-club, and buying-club characteris- tics and other control variables, particularly time effects. The model has been esti- mated using a database of 1,350 soccer transfer fees in England between June 1990 and August 1996. ‘The estimated model has been used to investigate the inflation rate of trans- fer fees. The transfer inflation rate is estimated at 11.6% per year over the sample period after allowing for the changing mix of players being transferred. This infla- tion rate is in line with past historical trends. Although this recent transfer inflation rate far exceeds that elsewhere in the entertainment and leisure industry, it is con- sistent with financial conditions in the soccer industry itself.273 ‘Transfer Fees in English Professional Soccer “(481 paxTeI-AUO) 10° 5 deg “(SAI payter-2uo) Co" S dy IEI-OM4 “[9A] Ey Loz 161 soe ure riz T6r ws" wath seSTU'P aeHEEL +917 ++666'> £09" 8€eL" sore SeoL" FoR" lose Taya TaaNaa 1aunad sTvoD sTvoo oval ovat oval 1ayMad oval sdVOTIOd anTOAaad LOLOVAT ova savoTInd aoV LOLOVAT gov gov aLVYTVOO aov ‘sonsua}oeeyo sofeyd auvarprutig pieaumoq preadn, Tewozu0H1 praumoc, parada Tewozu0H, uysuen Jo uomanq, SUOISIAIC] ONO] worstaig doy, -smeis [euOIstAIq, juowag ye Aq S9ag sdJsUVAy, Jo [poy pareuNsy Jo AreuMG Ff a1qRL274 Dobson and Gerrard The basic econometric model of transfer fees has also been applied to differ- ent segments of the transfer market. Segments in the transfer market have been defined in terms of the divisional status of the buying and selling clubs and the direction of the transfer. It has been found that the mean values of player character- istics differ markedly between segments. The estimated models for all of the seg- ments exhibit relatively high goodness of fit (.e., the intrasegment variation in transfer fees is highly systematic), but there are notable differences in the signifi- cance of specific player characteristics across segments. It has also been found that Under-21 international appearances are a significant determinant of transfer fees for the transfer market as a whole but are insignificant as a determinant of intrasegment variation in transfer fees in all six segments. The evidence of this study strongly indicates that the determination of trans- fer fees is highly systematic but differs across segments. The next stage in this line of research must be to develop alternative theoretical models of transfer fees, in which the distribution of rents in individual transfer fees is determined endog- enously. This will require the specification of alternative bargaining models with testable restrictions. There is also a need for further investigation of the appropri- ate definitions of the market segments. References Bird, PJ.WN. (1982). The demand for league football. Applied Economics, 14, 637-649. Boon, G. (Ed.). (1992-). Deloitte & Touche annual review of football finance. Manchester, UK: Deloitte Touche Tohmatsu. Brown, E. (Ed.). (1887-). News of the world football annual. London: Invincible Press. Carmichael, F, Forrest, D., & Simmons, R. (1997). Who gets transferred and for how much? Evidence from association soccer. Unpublished manuscript, Department of Econom- ics, University of Salford, UK. Carmichael, F, & Thomas, D. (1993), Bargaining in the transfer market: Theory and evi- dence. 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Reilly, B., & Witt, R. (1995). English League transfer prices; Is there a racial dimension? Applied Economics Letters, 2, 220-222. Rollin, G., & Rollin, J. (Eds.). (1970-). Rothmans football yearbook. London: Headline. Rollin, J. (Ed.). (1984). Soccer who's who. Enfield, Middlesex, UK: Guinness. Rottenberg, S. (1956). The baseball player’s labor market. Journal of Political Economy, 64, 242-258. Scully, G.W. (1974). Pay and performance in Major League Baseball. American Economic Review, 64, 915-930. Scully, G.W. (1995). The market structure of sports. Chicago: University of Chicago Press. Sloane, P.J. (1969). The labour market in professional football. British Journal of Industrial Relations, 7, 181-199. Sloane, PJ. (1971). The economics of professional football: The football club as utility maximiser. Scottish Journal of Political Economy, 18, 121-146. Somers, PM., & Quinton, N. (1982). Pay and performance in Major League Baseball: The case of the first family of free agents. Journal of Human Resources, 17, 426-436. Speight, A., & Thomas, D. (1997). Arbitrator decision-making in the transfer market: An empirical analysis. Scottish Journal of Political Economy, 44, 198-215 Szymanski, S., & Smith, R. (1997). The English soccer industry: Profit, performance and industrial structure. International Review of Applied Economics, 11, 135-154. Vrooman, J. (1995). A general theory of professional sports leagues. Southern Economic Journal, 61, 971-990. Vrooman, J. (1997). A unified theory of capital and labour markets in Major League Base- ball, Southern Economic Journal, 63, 594-619. Williams, J. (Ed.). (1987-). Digest of football statistics. London: The Football Trust. Acknowledgments We wish to acknowledge the financial support provided by the School of Economic Studies, University of Hull, for research assistance in the compilation of the database. Thanks are due to Matt Maydew, John Leeming, and Trudy Culshaw for compiling the database. We also wish to thank John Goddard, Kevin Reilly, Peter Smith, Simon Vicary, and two anonymous reviewers for their many helpful comments. We particularly wish to acknowl- edge the anonymous reviewer who suggested that the dependence of transfer fees on buy- ing-club characteristics could be caused by the side constraint. The usual disclaimer applies.Dobson and Gerrard 276 vu de Ip as0q st (pS) ip dor = 1 SG Jo snyeas jeuoIstalp 40} SAC. 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