ABSTRACT
The conventional economic model presumes that efficient outcomes prevail but this prediction is not consistent with the preponderance of evidence. In this chapter, we model how the persistence of inefficiency in sports performance is possible and can even be welfare enhancing in the realm of professional sports and we explain why market forces can’t easily correct this inefficiency. We build on x-efficiency theory, information complexity (related to bounded rationality), outcome uncertainty, and the notion that decision-makers (team owners in this case) are not simply guided by profit maximization or by the desire to maximize their level of material wellbeing. We argue that different organizational forms and different understandings or mental models of what makes for excellence in sports performance significantly affect sports outcomes. The latter is critically important as is the fact that inefficient sports organizations can be protected from market forces. Often decision-makers are characterized by ‘managerial slack,’ information gaps, and various decision-making ‘biases’ that yield sub-optimal outcomes from the perspective of sports performance. These inefficient outcomes can be a product of errors in decision-making, but they can also be consistent with the preferences of a cohort of decision-makers. It is important to model the fact that sports team ownership is not all about maximizing material gain or profit. Owners can maximize their utility simply by owning a team, even if it is x-inefficient. To be profitable in sports team ownership does not imply being x-efficient, especially when profitability depends on the popularity of a sports team. Losers can be extremely popular if they are an integral part of their community and generate significant demand for their product.
