Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society

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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

On the Effects of the Compensation Rule on the Free Agent Decision and the Salary Level

Vol.24, No.1, March , 16–36

English Version |  Korean Version
  •   (Korea Development Institute)

  •   (Sogang University)


The reserve clause requires the players to have a salary contract with the same team for a fixed periods of time. The free agency system allows the players to move to the other teams after the fixed periods of time specified in the reserve clause. We consider the effects of the compensation rule on the free agency decision and salary level under the reserve clause and the free agency system. For this, we analyze a two-period model consisting of 5 stages. The main results are as follows. If a player receives a salary comparable to his productivity in the period before he can apply for FA, he has no incentive for applying for FA. With a large gap between the minimum salary and his productivity, he applies for FA. In this case, the incumbent club strategically pays an salary higher than the minimum one (expected FA premium) in order to take advantage of compensation rule which obligates the new club holding the FA player to pay the incumbent club several times of the previous salary. The stronger is the compensation rule, the less incentive the players has to apply for FA, and less salary they receive.

   Reserve Clause, Compensation Rule, Expected FA Premium, Free Agency System

JEL classification codes
   C7, J3, J4

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