Performance, Salaries, and Contract Length: Empirical Evidence from German Soccer

The recent transfers of Christiano Ronaldo from Manchester United, and of Ricardo Izecson dos Santos Leite (Kaká) from Associazione Calcio Milan to Real Madrid—as well as the increasing financial problems of many of the top teams in the big five European leagues—have again increased the public's attention for the global football players’ labor market. Therefore, the paper addresses two important, and highly contested, issues: player remuneration and contract duration (players are usually considered as overpaid and poorly motivated. Using two different unbalanced panels from the German Bundesliga league that cover six and 13 consecutive seasons respectively (1997-98 to 2002-03 and 1995-96 to 2007-08), I show, first, that the variance in player salaries can be explained, to a large extent, by the variance in individual performance. That is, salaries can be explained by career games played and games played last season, previous and recent international appearances, and goals scored. Moreover, player position, leadership skills, and region of birth clearly matter as well. The impact of these characteristics varies across the salary distribution. Second, I find robust evidence that player performance—measured primarily, but not exclusively, by a subjective overall player rating from Kicker , a highly respected soccer magazine—significantly increases in the last year of the contract. In addition, the variance in player performance is significantly lower in the last year of the contract. These findings suggest that moral hazard is a widespread phenomenon, even in professional soccer.