Footballnomics #5: transfer market

The English and most other European top leagues are going into summer hiatus. Now the activities and attentions switch off the field: transfer market. No World Cup or European Cup for clubs to do their window shopping, so most player buys will be based on mostly last season performance.

Football transfer market has been subject to many criticism for the past few years because of the inflated players' value and wages. The late Pope John Paul II once raised his concern that a football player can earn up to GBP100,000 per week, while millions of people in the world are still living below the poverty line. Forgive them, Father, for whatever sin they have committed.

Apart from that, explaining (or modeling) the transfer market is indeed a challenging task. What makes a club willing to pay GBP20m or more for a player (and pay him another 100k a week)? The player market is different from the regular labor market. It does not deal with labor with homogenous characteristics. It is rather a monopolistic competition market because each player have a monopoly over his skills that distinguish him from other players, which are observable by clubs. In the standard labor market, each workers have different skill. But firms can not observe each individuals, so they look at the pool of similar workers, and the market wage is the average earning of an average worker. Consequently, we cannot exactly draw the market demand/supply curve for player. (Therefore, it is more relevant to compare player market with the market for executive or other professionals).

So, again, what determines a player's transfer price and wage? The first and foremost is, of course, skill. This is very observable. A striker is judged by his goal tally; a midfielder by assists or passes completed; a defender by tackles; a goalkeeper by number of clean sheets or saves. Number of caps can also be another measure. There are also subjective measures like 'work rate' or 'contribution to team's success.'

A second factor is how far does a player have before his contract expires.* Obviously, when a player is closer to the end of his contract, the options for the club is either sell him in discounted price, or receiving nothing when the player decides not to extend his contract and becoming a free agent.**

If you think of a wage regression model, you may want to add a third thing: dummy variable for British player. For no obvious reasons, British players tend to be overvalued. Aston Villa just paid GBP7m for West Ham's Nigel Reo-Cooker, and Newcastle paid GBP5.5m for Man City's Joey Barton, and they don't even make it to the senior national team. The price of British youngsters are also inflated. That explains why most managers prefer to look for youngsters from the continent. And the English FA officials are complaining that the national team is suffering from the under-representativeness of English players in the top teams?

Some purchases are speculative. For example, youngsters are valued by their 'potentials for success' although they are yet to have established record. Players like Wayne Rooney may, up to know, justified their values. But no one knows why in the hell that Arsene Wenger was willing to pay GBP12m for Theo Walcott. (To be fair to Mr. Wenger, his buying record was excellent. But he made some blunders like Francis Jeffers a few years ago). Some players are skillful but injury prone. Newcastle paid GBP15m for Michael Owen who spent most of last season on the treatment table. Success in a country's league does not mean a replication in the other country's (Andriy Shevchenko, GBP30m from AC Milan to Chelsea). Some players are skillful but have off the field antics. And so on.

And some players are bought for partly non-footballing reasons. Think about the Asian players in the European leagues. Why do you think the reason Real Madrid bought David Beckham? And the motive behind Beckham's move from Los Galacticos to L.A. Galaxy?

Then, we can not ignore the role of agents in determining players' moves, transfer prices and salaries. Not that agents are bad. They do reduce searching costs, so players and managers can concentrate in training while their agents do the dirty work. Nevertheless, agents are also allegedly contributing to the players' inflated prices, although they do it legally. Well, some don't do it legally, like the recent allegation of transfer 'bung' involving Wimbledon FC.

Speaking about agents, I recently had a chat with an Indonesian sport journalist. According to him, transfer bung are very common in the Indonesian league. Here how it works. An agent offers the manager a deal to purchase a player he represents, and promised to share the transaction fee (or part of the player's monthly salary). It's the standard principal-agent problem since it's the club money, not the manager's. That's why we see a lot of foreign players with almost zero quality in the league (one player was a plumber in his home country).

Note:
* According to the Bosman rule, 6 months before his contract expires, the player can sign a pre-contract with the new club. That's why when clubs want to keep their star players, they must negotiate a new contract when the players are as far as 2 years away from the end of their contracts. If the negotiation collapse, the club at least will be able to sell the player at the beginning of his final season.
** If the club gets a player for free, that means the club has more money to increase the salary. Hence, we see many 'free' players have higher salary level.