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Optionality in Australian Football League draftee contracts
Jemuel Chandrakumaran1, Paul Larkin1,2, Sam McIntosh1,3
1Institute for Health and Sport (IHES), Victoria University, Melbourne, Australia.
Plos One
|September 14, 2023
Summary
This study proposes a call option for Australian Football League (AFL) teams to extend draftee contracts, avoiding monopsony issues. This option allows contract extension without restricting player movement or increasing monopsony power.
Area of Science:
- Sports Economics
- Labor Market Dynamics
- Contract Theory
Background:
- Player drafts aim for talent equity but can create labor market monopsonies, restricting player movement.
- The Australian Football League (AFL) faces calls to extend initial draftee contracts, potentially exacerbating monopsony issues.
Purpose of the Study:
- To propose an alternative to extending draftee contract lengths in the AFL.
- To introduce a "call option" mechanism for teams to extend draftee contracts.
- To analyze the financial implications and impact on player mobility.
Main Methods:
- Utilized the Black-Scholes model to calculate call option prices per draft pick.
- Valued call option prices as a percentage of the draft pick's value.
- Examined the relationship between pick value and option price, considering behavioral factors.
Main Results:
- Call option prices were calculated to be between 1% and 1.5% of the pick value.
- Option pricing did not consistently increase with pick value, influenced by managerial overconfidence and sunk investment.
- The proposed call option offers teams flexibility without further restricting player movement.
Conclusions:
- The call option provides a viable mechanism for teams to extend draftee contracts.
- This approach mitigates concerns about increased monopsony power and restricted player mobility.
- The findings offer a novel solution for talent management in professional sports leagues.
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