Williamson, the Economics of Governance, and Sport

As most economists would know by now, Oliver Williamson won half of the Sveriges Riksbank Prize in Economic Sciences earlier this week. By this stage, half of the economics bloggers in the world have whipped themselves into a frenzy, so the questions should be asked, what role for Williamson and transaction cost economics in sports economics, or more broadly, sports management?

As the recent Amicus Brief prepared by Roger Noll and a good many other esteemed sports economists for the US Supreme Court case American Needle v NFL shows, questions of governance and the efficiency of league design are central issues in our discipline. Yet bizzarely, given the nature of sporting leagues, it may be argued that we see fewer references to quite important theories of the firm and of economic governance in the sporting domain than in other elemenst of the economics profession where the idea of a ‘hybrid’ organisation is less readily visible.

At the very least (and apologies to the authors below for this is a sample of three) if we look at the most recent sports economics textbook on the market by Downward, Dawson & Dejonghe (2009) ‘Sports Economics: Theory Evidence & Policy’, ‘transaction cost (economics)’ doesn’t make the index (nor do ‘agency’, ‘hold up’ or ‘residual claimant’ for that matter), O. Williamson cracks it for five citations in the bibliography, and, for that matter, three of the classics of the theory of the firm: Coase (1937), Jensen & Meckling (1976) and Alchian & Demsetz (1972; who in fact have a lengthy footnote on the nature of sporting leagues which is worthy of discussing any time we mention Walter Neale’s ‘peculiar economics’ of sport in my opinion) all miss out.

The same problem exists in one of the leading recent texts in sport management, Hoye & Cuskelly (2007 ) ‘Sport Governance’, where at least there are some index listings for agency theory, though Williamson, Coase, Jensen, Meckling, Alchian and Demstez all miss out of a citation. In Trevor Slack & Milena Parent’s (2005) ‘Understanding Sports Organizations: The Application of Organizational Theory‘ the index at least is even more grim; so maybe economics can’t be used to study either organisations or governance. Hmph.

Things are much more promising in the aforementioned amicus brief, where transaction costs and the relative efficiency of markets and hierarchies, Williamson and Coase (1937) all attract attention. So where to from here for sports economics and the economics of governance?

We have the Europeans, Franck, Dietl and co. suggesting no role for an independent competition organiser, though seem very keen on the assumption that an independent competition organiser has a profit motive of its own (we can blame Bernie Eccelstone for that I guess). In Anglo corner we have Szymanski & Ross arguing from a legal as much as an economic viewpoint, in favour of an independent competition organiser, though they seen to be still grappling with the question of who should own that independent competition organiser. Meanwhile, Down Under, we have had a competition organiser that we’ve been writing about down here in the Australian Football League for twenty-five years, where the only residual rights accruing to the not-for-profit clubs are (i) the right to elect the Board of that independent competition organiser and (ii) to overturn a decision of that independent competition organiser to admit, expel, merge, or relocate clubs.

Has the world of sports economics been so focussed upon Rottenberg (1956) and thus Coase (1960), that we have forgotten the earlier lessons of Coase (1937), his arguably natural succesor Oliver Williamson and other theories of the firm to our detriment? The charge is far more damning in the domain of sport management, where I have literally read sport governance / organisation research that can get away with ignoring both the economics and the law of governance… . That would be alright in itself if it were harmless – let the ‘kinesiologists’ cite themselves to live long day without ever going back to the first principles of economics they probably weren’t taught in the first place (see Humphreys & Maxcy (2007) for more on that) – except for the fact that such research is informing government agencies with regulatory oversight on the matter of how regional, national and international sports governing bodies should be structured. This just reminds me of Hayek’s concerns in ‘The Fatal Conceit’.

Anyhow, congratulations to Williamson and Ostrom!

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Author: Robert Macdonald

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