PLAY WITH MISMATCHES

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PLAY WITH MISMATCHES

Name: Jonah Oswald

Student Number: s3470997

Supervisor: Samuele Murtinu

Co-Assessor: Florian Noseleit

Word Count: 11939

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Abstract

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1 - Prologue

1.1 Introduction

In markets with multiple actors, it often requires the work of agents to optimize the resource allocation. This applies especially to human resources, where an agent matches prospective employees with firms that are looking to hire. As such, agents can be seen as transactional catalysts, their role is to match actors with each other and thereby encourage exchange. Agents, typically self-employed, behave highly entrepreneurial. They work with an entrepreneurial mindset to profit off their ability to coordinate transactions. In some cases the value they create or add is more ambiguous, which arguably makes it more intriguing from an investigative standpoint. One of those cases is that of the football agent. Football agents are notorious for earning lucrative fees when their clients sign a new deal, and it seems as though every football player has an agent. Not only have the fees that agents earn rapidly increased, but they are more influential than ever. For these reasons, football agents are the subject of this thesis, and the aim is to highlight the practices that make it such a lucrative and influential role in the industry.

The sports industry generates close to 1% of global GDP yearly, with football (or soccer) being the leading market (Collignon & Sultan, 2014). With European club revenues having more than tripled this century (UEFA, 2016), and the previous transfer record having been broken three times in the two transfer windows of 2017/18, the expenditures on the transfer market are soaring. Unlike traditional business, European football clubs are typically win-maximizing instead of profit-maximizing, and as such are inclined to operate on a loss if it means being successful on the pitch (Kesenne & Pauwels, 2006; Solber & Haugen, 2010). In pursuit of wins, clubs constantly look to strengthen their squad by investing financially in the transfer market, to recruit the best talent possible. With transfer spending having reached a record high of 5.6 billion Euros in the summer window of 2017 (UEFA, 2016), the ever-increasing amount of commissions is making the industry of football agents a lucrative one. UEFA's Club Licensing Benchmarking Report reviewed 2,000 transfers between 2014 and 2017 where agent-fees averaged a 12.6% amounting to 'an eye watering' 1,270 million Euros. Not only is the industry lucrative for the agents, but the agents are also important actors in the industry – the most influential, some argue (Magee 2002). Agents are essentially talent managers for professional athletes, so they rely on their ability to manage football talent. Precisely how do agents become these influential actors in the market?

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4 the relational dynamics between the three parties (players, clubs, and agents) who are involved in joint value-creation can be explained by means of the Stakeholder Theory. Finally, this thesis will integrate

Social Capital Theory and Limited Attention Theory to understand the value that football agents create

and the demand for an agent’s service.

After an extensive review of the literature, this Thesis develops a narrative that uses several real-life examples to demonstrate how the combined theories explain the phenomenon under investigation in practice. Overall, this thesis takes a conceptual approach at highlighting the theoretical mechanisms behind the activities of an agent. This will result in several testable propositions aimed to highlight the process by which agents gain and maintain market power; this enables future studies to empirically investigate the role of the agent using these propositions. Such an approach may highlight the management-related mechanisms of the football industry, and allow comparisons between the football industry and other industries.

2 – A glimpse of the phenomenon

2.1. Agents’ activities

In order to identify relevant management theories, which can be used to model the role and behavior of an agent, it is necessary to briefly touch on the core activities of agents. According to Demaziere and Jouvenet (2013), there are three main activities: (1) representing players to clubs, (2) trying to capture quality players in their portfolios, and (3) developing relations of trust with the clubs. Other studies (Poli 2010; Rossi 2010) categorize the tasks of an agent as: (1) the negotiation of contracts for players, (2) the scouting of footballers for clubs, and (3) the management of the best-known players' image rights. The agent represents a players’ interest in different transactions. Thereby the agent-player relationship can be modelled using Agency Theory; meanwhile basic transaction cost economics, such as Property Rights

Theory, can be used to understand the transactional aspects of the agent’s activities. The transaction cost

theory applies to the two transactions; the one between a club and the agent on behalf of the player, and between the agent and the player. When examined holistically, the dynamics between the three parties can be compared to the relationships between stakeholders. Stakeholder Relationships characterize the relationships between stakeholders, internal (i.e. manager, coach, players) and external (i.e. agents, intermediaries), who are involved in joint value-creation.

2.2. The role of social capital

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5 Agents who are former players have an advantage as they can leverage their networks of players, coaches, and managers (Poli et al. 2012). As identified by Demaziere and Jouvenet (2013) a typical transfer (that involves buying a player out of his contract) requires the consent of three parties: the selling club, the buying club, and the player. In order to achieve consent between these three parties agents have to understand the wants and needs of each, which makes information a currency in the football market (Demaziere & Jouvenet, 2013; Rossi, 2010). In the football market, agents are 'carriers of information' (Demaziere & Jouvenet, 2013) and they leverage this information to accelerate player mobility, leading to more transactions, and thus more commission (Rossi 2010). In order to maximize the flow of relevant information and ensure its timely delivery, agents rely on extensive networks.

In the transfer market, weak ties often prove extremely important for transmitting valuable information regarding the transfer status of players and their quality (Roderick 2006; Rossi, 2010). In the football market, the club managers as employers have a wealth of information at their disposal, regarding the skill-set and personality of prospective employees (Demaziere & Jouvenet, 2013). Despite this transparency, there is still a degree of uncertainty associated with transfers, especially when looking at the more peripheral clubs, which target lesser-known players (Demaziere & Jouvenet, 2013). Club officials are under scrutiny from the media and the fans to make the right transfer-decisions in light of the abundant information. Therefore, an acquired skill for an agent is to minimize the uncertainty surrounding their client as best as possible (Demaziere & Jouvenet, 2013). Agents represent their clients in negotiations with the managers of clubs, and often enough the managers rely on them to establish trust; thus to managers they are a 'necessary evil' (Rossi, 2010).

“The place that agents occupy in the market seems to be less the result of a concerted and coherent strategy than it is dependent on the ‘grips’ and ‘affordances’ that the evolution of professional

football has gradually revealed” (Demaziere & Jouvenet, 2013, p. 32)

Boiling down the value-creating activities of agents to brokerage and the minimization of uncertainty, which is a function of trust, it starts to paint agents as skilled wielders of social capital.

Social Capital as defined by Lin (2017) is ‘investment in social relations with expected returns’.

2.3. Understanding the demand for agents

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6 heavily on their squad and talent pool, thus this win-oriented behavior leads to a highly competitive labor market. This highly competitive market environment represents an overwhelming workload on the recruitment department of a club. Essentially each recruitment department possesses a certain capacity for processing information and executing based on those outcomes. On that note, Sims (2002) stresses that information-processing capacity is limited, and that this should be widely accepted. The limited nature of information-processing capacity will be modelled based on Limited Attention Theory, and said theory will go some way to explaining the need for agents.

2 – Market Environment

2.1 Win-Seeking Behavior

In order to understand the competitive nature of the labor market in football it is pivotal to outline the objectives of the football clubs. While football clubs nowadays have marketing and finance departments like a typical business, they are not necessarily as profit-oriented as the average business. The reviewed literature has brought forth different models in an attempt to outline the objectives of football clubs (Solberg & Haugen, 2010; Kesenne & Pauwels, 2006; Sloane, 1971). The starting point of such a discussion is a comparison between European- and North American sports clubs, and how they have different priorities. Solberg and Haugen (2010) summarize the different viewpoints on the objectives of sport teams as that European soccer clubs are utility maximizers while North American teams are profit maximizers; they add that the reality is more likely a continuum with two extremes, on which behavior is more profit maximizing or more utility maximizing. In their study about the large revenues in football, Solberg and Haugen (2010) point out: “this paradox, namely that sports clubs with enormous revenues operate at the brink of bankruptcy, has been a European phenomenon” (p.331). Kesenne and Pauwels (2006) support this, as they argue that the reality of many European countries making losses reflects the notion that European sport clubs are closer to utility maximization.

A utility maximization function includes both profit and success, along other variables including attendance (Kesenne & Pauwels, 2006; Sloane, 1971). Kesenne’s (1996, 1999, 2000;; Kesenne & Pauwels 2006) introduced a win-maximizing model as a variant of Sloane’s (1971) utility maximization model. In regards to operationalizing a utility model, with specific regards to shareholders, Sloane (1971) explains that shareholders in a football club invest money for aforementioned psychic income such as power, prestige, or the feeling of belonging to a group. According to Sloane (1971), decision-makers at football clubs will prioritize football matters as long as the club is financially viable.

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“THE DIRECTORS MUST IN ONE WAY OR ANOTHER MAINTAIN THE FINANCIAL VIABILITY OF THE CLUB, AND MAY NOT, THEREFORE, BE PREPARED TO PAY OUT LARGE SUMS ON THE

TRANSFER MARKET WHEN PLAYING PERFORMANCE MAY WARRANT SUCH ACTION” (SLOANE, 1971, P. 135)

“IF WE ASSUME A CLUB TO BE MAINLY INTERESTED IN SPORTIVE SUCCESS, WHICH MEANS TRYING TO WIN THE CHAMPIONSHIP OR AS MANY GAMES AS POSSIBLE, THE ONLY WAY TO REACH

THAT GOAL IS TO HIRE AS MUCH PLAYING TALENT AS POSSIBLE, WITHIN THE LIMITS OF THE (EXPECTED) BUDGET, OR GIVEN A FIXED PROFIT RATE THAT IS NEEDED TO SATISFY THE

SHAREHOLDERS OR TO FINANCE STADIUM INVESTMENTS OR TALENT DEVELOPMENT” (KESENNE & PAUWELS, 2006, P.550).

So far, there is somewhat of a consensus that clubs are willing to trade profit for success to an extent. In their paper, Solberg and Haugen (2010) demonstrated the relationship between operating profit and performance with the Scottish Premier League Table in 2000/01 (see Appendix 1).

“CLUBS ARE WAGE-TAKERS ON THE PLAYER LABOR MARKET. THE UNIT COST OF A PLAYING TALENT IS DETERMINED BY DEMAND AND SUPPLY ON A ‘FREE AGENCY’ PLAYER LABOR MARKET

OR ON A COMPETITIVE TRANSFER MARKET WHERE PLAYERS ARE TRADED BY THE OWNERS.” (KESENNE & PAUWELS, 2006, P. 551)

The results show a clear pattern, ‘the better the clubs performed, the worse was the financial result’ (Solberg & Haugen, 2010, p.337). Clubs are willing to run operating losses if it means being successful on the pitch, this is a result of the aforementioned psychic income that stakeholders and shareholders hope to reap from an investment in a club, emotional or otherwise. This table not only shows that clubs are willing to do it, but that there is merit to the effectiveness of it. Due to the importance of on-pitch success, football clubs are less responsive to changes in the price of players.

2.2 The Food-Chain Pyramid

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“THE DRAWING POWER OF FOOTBALL CLUBS VARIES ENORMOUSLY, WHICH ALSO REFLECTS THE DISTRIBUTION OF REVENUES. THIS HAS INITIATED A PATTERN WHERE THE RICH CLUBS BUY UP

THE MOST TALENTED PLAYERS FROM THE ‘LESS RICH’ CLUBS” (SOLBERG & HAUGEN, 2010, P. 338)

In fact, for many football clubs further down the ‘food chain’, with less drawing power, selling players to wealthier clubs is an important part of their strategy (Solberg & Haugen, 2010). The idea is to consistently recruit young players, and develop them so that bigger clubs will pay lucrative fees for them. This ‘food chain’ represents a power structure in football by which the best talent eventually diffuses up the food chain (See Appendix 2).

Appendix 2 visualizes the aforementioned food chain as a pyramid, with clubs having more ‘drawing power’ (Solberg & Haugen, 2010) as they go up in the pyramid. The pyramid represents 15 of the top 16 most valuable clubs in terms of transfer value based on the values from widely cited transfer portal transfermarkt.co.uk (Inter was omitted for Dortmund’s inclusion based on contemporary international success). Said drawing power has several minor factors that differ depending on the personal preference of a player, such as geographical location or personal emotional ties to a given club. However, the two main ones, which are also the most relevant to an agent, are success (represented on the left arrow by a trophy) and money (represented on the right arrow by a dollar sign). Clubs at the peak of the pyramid like Barcelona, Real, or Bayern, have both; a little further down you have the newly rich clubs PSG and Manchester City that have yet to win European trophies. Even further down you have periodically successful clubs such as Atletico Madrid (UEFA Cup / Europa League Winners 09/10, 11/12, and 17/18) or Dortmund (Champions League Runner-Up 12/13); finally, below those clubs and not represented on the pyramid, are clubs that operate in the periphery of the European spotlight.

Solberg and Haugen (2010) discuss the relationship between strategy and performance, where an aggressive strategy represents being aggressive in recruitment thereby incurring high costs with the aim of acquiring the best talent (this will be elaborated on in a later section). Since players will generally be naturally drawn up the pyramid, if their talent allows it, the best talent will eventually diffuse up the pyramid. If one considers real-life example of transfers, this becomes increasingly clear.

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9 playing near the top of the pyramid for Real Madrid transferred to Napoli (2013). Napoli would most likely not even be represented on such a pyramid represented the European elite in 2013, however with a revitalized Higuain they became a European presence, and eventually Juventus signed Higuain (16/17) marking his return closer to the Pyramid Peak. Supporting this notion with quantitative evidence exceeds the scope of this thesis, and as such, the presented anecdotal evidence will suffice to reach an acceptance of the idea that better players diffuse up the pyramid to better clubs.

3 – Theoretical Foundation

3.1 Social Capital Theory

Lin (2017) developed his aforementioned definition of Social Capital based on rigorous review of previous literature (Bourdieu, 1983/1986; Bourdieu, 1980; Coleman, 1988; Coleman, 1990; Erickson, 1995; Erickson, 1996; Flap, 1994; Flap, 1991; Lin, 1982; Lin, 1995; Portes, 1998; Putnam, 1993; Putnam 1995). Lin (2017) refers to so-called ‘embedded resources’ within social networks as being the sources of value-generating elements. Lin (2017) categorizes these elements as following: information, specifically about opportunities and competition; influence, especially on decision-making process; and

social credentials, which signal social proof regarding their ability to add value.

In his paper, Lin (2017) examines “(1) how individuals invest in social relations and (2) how individuals capture the embedded resources in the relations to generate a return” (p.32). A secondary perspective of Lin (2017) is the examination of social capital at group level, looking at “(1) how certain groups develop and maintain more or less social capital as a collective asset, and (2) how such a collective asset enhances group members’ life chances” (p.32)1_.

After a thorough literature review, Lin (2017) comes to the following definition of social capital: “resources embedded in a social structure which are accessed and/or mobilized in purposive actions” (p.35). The definition can be broken down into three elements: (1) structural embeddedness, (2) opportunity accessibility, and (3) action-oriented use (Lin, 2017). While Burt (2017) focuses on the location of an individual within their network, contrary to which Lin (2017) looks at embedded resources. Lin (2017) breaks down these social resources into network resources, resources within the one’s ego-networks, and contact resources, the resources a specific contact possesses (i.e. wealth, power, etc.)

Lin (2017) postulates that different network locations have different advantages, and thus the ideal location depends on the end that an individual is seeking. In terms of social capital, there are two

1 _{This second perspective at group level exceeds the scope of this thesis, however the concepts}

developed1_{in this thesis could (and perhaps should) provide a strong basis for future research on said}

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types of outcomes according to Lin (2017), instrumental actions and expressive actions. Instrumental actions result in gaining added resources, while expressive actions maintain possessed resources. Appendix 3 shows the two different approaches to Social Capital, and the relevant elements of each. In an effort to outline the different approaches towards social capital Burt (2017) emphasizes the relevance of the works of Coleman and Putnam. Based on Coleman’s work (1988; 1990), Putnam (1993, p.167) defines social as following: “Social capital here refers to features of social organization, such as trust, norms, and networks [,] that can improve the efficiency of society by facilitating coordinated action”. Burt (2017) repeatedly addresses what is implied to be an accepted truth, that is, information circulates within groups before circulating between groups; this results in uneven diffusion of information over time, which creates opportunities for exploitation.

Structural holes are a construct that allows one to generate social capital by controlling the diffusion of information (Burt, 2017; 1992). Burt (2017) highlights the different aspects of structural holes as brought forth by the literature in sociology and economics. These include the strength of weak ties (Granovetter, 1973), betweenness centrality (Freeman, 1977), benefits of exclusive exchange partners (Cook & Emerson, 1978), autonomy through complex networks (Burt, 1980), potential network models of competitive advantage (Merton, 1968; 1957).

“THE STRUCTURAL HOLE BETWEEN TWO GROUPS DOES NOT MEAN THAT PEOPLE IN THE GROUPS ARE UNAWARE OF ONE ANOTHER. IT ONLY MEANS THAT THE PEOPLE ARE FOCUSED ON THEIR

OWN ACTIVITIES SUCH THAT THEY DO NOT ATTEND TO THE ACTIVITIES OF PEOPLE IN THE OTHER GROUP”

(BURT, 2017, P.34-35)

Furthermore structural holes separate insulated sides with ‘nonredundant’ flows of information;; moreover individuals who are located at crossroads between different groups are so-called ‘opinion leaders’ (Burt, 2017; 1999a/b). Burt (2017) goes on to describe the benefit of having a large network and being well connected that is to become a more attractive contact. This is also referred to as the network-effect, the more contacts one has the more attractive they become as a potential contact.

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distinct mechanisms, such that a dense network with high closure results in trust while brokerage across structural holes can create value. When both mechanisms are integrated into a network, (see Appendix 4), performance can be maximized and as Burt (2017) puts it: „Brokerage across structural holes is the source of value added, but closure can be critical to realizing the value buried in structural holes” (Burt, 2017, p.31).

3.2 Limited Attention Theory

In past literature, the process of devoting attention to various tasks has been explained in different ways. Sims (2002) suggests that the notion of information-processing capacity being limited should be widely accepted. In his theoretical paper, Sims (2002) goes on to incorporate information-processing constraints into economic models to show the finite nature of capacity. This theoretical approach can be simplified; in his book, Attention and Performance VIII (1980) Nickerson postulates that tasks demand resources from a single reservoir of such (Knowles, 1963; Moray, 1967), and as tasks demand more resources the availability of resources to other tasks is diminished (p.240). Essentially Sims (2002) conducts his research on the underlying premise that is elaborated upon in Nickerson’s book, which is that attention is a resource, which is finite and has to be allocated among tasks.

The literature in the area of psychology offers more practical insights into how limited attention manifests itself in performance. Kaplan and Berman (2010) provide an example from reviewed literature (Baumeister & Vohs, 2004; Bronson, 2000) in which two mechanisms, executive functioning and

self-regulation; depend on the common resource that is attention. Executive Functioning is a ‘high level

cognitive mechanism’, while self-regulation is the mechanism by which an individual regulates their behavior and ‘resists temptations’ (Kaplan & Berman, 2010). Attention is thus classified as a finite resource that is allocated in a trade-off between the two mechanisms (Kaplan & Berman 2010). This approach of attentional resources will be adopted for this thesis as it is perhaps more practical than information-processing capacity.

Kaplan and Berman (2010) cite a study conducted by Baumeister et al. (1998) which showed that high self-regulation diminished the performance for executive-functions. Furthermore they cite Schmeichel et al. (2003) to have shown similar effects when self-regulating by for instance ‘stifling emotional distress responses’ and having to perform an executive-function such as taking the Graduate Record Examination (GRE). To further dissect the constituents of attention Kaplan and Berman (2010) adopt the two different types of attention from James (1892), voluntary- and involuntary attention. Involuntary attention requires no effort and is drawn by stimuli (Kaplan & Berman, 2010; James, 1892); strong stimuli can distract from other tasks (Kaplan & Berman, 2010; Larson & Merritt, 1991).

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12 Bargh, 2006; 2013). Kaplan and Berman (2010) argue that involuntary attention is more autonomous and stimulus-driven, while voluntary attention is more goal-directed and controlled (p.46). Furthermore, Chein and Schneider (2005) present the notion that tasks can become more automatic with practice.

A wealth of literature has been reviewed to examine the construct of attention and the different types. It has been established that there are two types of attention, directed and involuntary. However, it is important to briefly outline how directed attention may be allocated. Nickerson (1980) suggests that allocation of attentional resources may be subject to two types of manipulation, Priority- and Difficulty

Manipulation. As the names suggest these types of manipulation, allocate attention based on

prioritization and/or difficulty, respectively. Nickerson also very briefly mentions the relevance of

Parsimony, which is relevant as it describes an individual’s unwillingness to spend resources.

3.3 Outsourcing Career Management

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13 Lewandowski made a management switch to Pini Zahavi, allegedly in the hope of benefiting from the latter’s network closure to Real;; this example will be elaborated on in section 5.2.

3.3a Players allocate attentional resources towards performance, of which their athletic performance is highly prioritized.

In the literature review, it was outlined how win-seeking behavior influences the transfer strategy of football clubs. Essentially football clubs are more willing to incur costs if it helps strengthen the squad and increasing the likelihood of success on the pitch. In their search for players, clubs are essentially employers looking to recruit top-level employees, and in order to make informed decisions they conduct more or less thorough screening. Keller (2004) describes that screening is important for traditional businesses, as suboptimal hires can cause ‘financial fallout’ in a variety of ways. Similarly, football clubs can face immediate fallout from poor hires, such as on-pitch performance or the atmosphere in the dressing room. However, the stakes tend to be higher in football for two main reasons. Firstly due to the high wages (clubs may be assumed as wage-takers). Secondly, the performance of new hires can be almost immediately observed and thus stakeholders can hold the hiring manager accountable. Overall, the financial stakes are high and the transparency results in a high-pressure environment for the manager. For this reason the process of screening potential employees or players in this case, to evaluate suitability, is important in a football club. This holds especially true if the new hire is one of the starting eleven.

Spence (1974), in the context of employers screening potential employees, develops a screening function that includes a variable for productivity, which is not observable, and a variable for an observable factor that could for example be education. Education in this case would represent the signal; graduates use their resumes to signal their qualification to employers. In the case of a football player, productivity would be the performance that the player displays at the new employer / club, while the

signal would be any past performances in terms of statistics and/or other evaluations. In the introduction

it was mentioned that club managers (or whoever is in charge of recruitment) have access to a wealth of information to make recruitment decisions, and that despite this fact there is always a level of uncertainty regarding the performance a new recruit will provide (Demaziere & Jouvenet, 2013). This uncertainty is a major factor in the recruitment process because the skill-level of a football player can be highly subjective. Furthermore, even if there is agreeance over a player having performed at a high level for a previous employer / club, the human factor creates uncertainty regarding whether a player will continue to deliver the same productivity in a new environment.

3.4 Ambiguity and Uncertainty

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14 Consequentially, he then transferred to Chelsea for 58.50 million Euros, who at the time arguably occupied a position higher up in the pyramid, where he scored 45 goals and provided 35 assists in 172 caps. It is important to note that Torres did accumulate almost the same amount of playing time, actually 11 minutes more for Liverpool (10,943 minutes for Liverpool vs. 10,932 minutes for Chelsea) – however playing more minutes spread across fewer caps indicates higher importance. Torres contributed a goal or assist roughly every 108 minutes for Liverpool, and every 137 minutes for Chelsea, that’s almost a third of a game worth of time more that Torres required affecting Chelsea’s game. To this day there is causal ambiguity regarding why Torres’ performance dropped off, even if the reasons were identified after the fact, recruiters are often blamed for not identifying hazardous characteristics beforehand. Perhaps in this scenario the stakeholders were as surprised at Torres’ drop in performance, and this surprise outweighed any feelings of blame towards recruiters for a poor decision. Based on Torres’ goal-scoring record he was a great edition to the squad, and said goal-scoring record was the most accessible signal; also for a forward, the goal-scoring statistic is the most important performance indicator. Essentially, despite Torres still having provided a respectable goal tally for Chelsea, his signing turned out to be a disappointment due to his performance relative to his Liverpool time. The disappointment was primarily directed at Torres rather than Chelsea’s recruiters because they had every reason to believe Torres would perform similarly at Chelsea.

Thanks to media coverage of not only football matches, but also what goes on behind the scenes at clubs, pundits have a superficial idea of what information the club bases their decisions on. In the case of Torres, the unsatisfactory outcome was rendered more a fault of the player than a fault of recruitment; the following however is a counter example. In 2008, German First Decision club decided to forego hiring Jürgen Klopp as their new coach. Chief Executive Officer at the time, Bernd Hoffmann, reportedly had scouts evaluate different candidates for the coaching position (Ostendorp & Hesse, 2014). The scouts and Bernd Hoffmann allegedly rendered Klopp inadequate for the job based on his habits regarding clothing, grooming, and articulation. Since that decision in 2008 Klopp went on to become head coach of Dortmund and later Liverpool, finishing runners-up in the coveted Champions League with both teams in 2012/13 and 2017/18 respectively - arguably both times as stark outsiders. Since 2008, Hamburg has continuously spiraled down in the table climaxing in their first ever relegation from the top tier in 2017/18 and this spiral was accompanied by chronic speculation regarding the cause. There is no way of telling with absolute certainty how Klopp would have performed in charge of Hamburg. However the club’s stakeholders know what apparently prompted this decision and heavily scrutinize it due to the outcome, that is Hamburg experiencing years of poor performance while Klopp went on to become arguably one of the best coaches in the game.

3.4a A player’s perceived ability is subjective.

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so-15 called Noise. This approach can be adopted for classifying information regarding the attributes of a player, or a coach for that matter. In the example of the Klopp Case, Klopp’s clothing- and grooming habits were evidently identified as signals of inadequacy for the coaching position. However, the outcome suggests that these should have been classified noise, while his record and performance with Mainz (his club at the time) perhaps were signals. The two anecdotes demonstrate the difficulty associated with evaluating a player’s (or coaches’) productivity, because unexplainable gaps between productivity and expected productivity can occur like in the case of Torres. As Barzel (2012) exemplified using the NFL, a player’s productivity is likely to differ based on the team;; however, this is not clearly delineated. Thus, in conclusion recruiters are tasked with filtering signals from noise to identify productivity; however due to the human factor a player may end up not living up to the expectation anyway. Barzel’s (2012) observation of the NFL suggests that experts are often not sure themselves regarding the performance of players. Thus in the case of Klopp, even though the outcome and evidence strongly suggest Klopp would have been a better choice for Hamburg, it could very well be that he would not have suited Hamburg – this however is impossible to definitively conclude after the fact.

3.4b Player ability is not enough to determine a player’s suitability to a team.

3.4c Part of the manager’s job is to evaluate performance by filtering signals from noise. 3.4d Noises and Signals are not definitive, even after the fact.

In regards to attentional resources, as discussed in the literature review, the process of screening potential transfer targets is highly demanding. Thus, it can be inferred that the processing information, and filtering the signals from the noise, requires a great amount of attention. This is where agents come into play and why clubs tolerate and even seek agent engagement – going so far as to outsource part of the recruitment process (i.e. manager asks agent to compile a list of potential squad enhancements due to time constraints)

4 - Transactions

4.1 Agency Theory

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“AN AGENCY RELATIONSHIP HAS ARISEN BETWEEN TWO (OR MORE) PARTIES WHEN ONE, DESIGNATED AS THE AGENT, ACTS FOR, ON BEHALF OF, OR AS REPRESENTATIVE FOR THE

OTHER, DESIGNATED THE PRINCIPAL, IN PARTICULAR DOMAIN OF DECISION PROBLEMS” (ROSS, 2000, P.134).

Football agents typically receive a percentage of the player’s salary (10 – 15%), but it is common practice for agents to demand and usually receive signing bonuses, which are paid out directly by the club. In a multimillion Euro transfer transaction, there is a variety of potential fees that are paid out and thus it creates an intricate incentive structure. A real-life example of this is the Paul Pogba transfer from Juventus to Manchester United (16/17) for a fee north of 100 million Euros. Pogba’s agent Mino Raiola, who happens to be one of the most powerful agents in the world, brokered this transfer (Conn, 2017). Raiola reportedly received signing bonuses from Juventus and Manchester United that amounted to more than 20 million Euro, on top of his portion of Pogba’s salary. Essentially, Raiola was financially incentivized by both sides of the transaction to ensure the deal would be successful; this represents not one, but multiple conflicts of interest. Laffont and Martimort (2009) explain that an agent may forego a potentially more profitable project for a ‘nontransferable private benefit’;; this is when agency costs arise. Perhaps more likely in the case of a football agent, an agent might forego a potentially more competitive project for a private financial benefit; since the agent is the liaison for transfer enquiries and contractual negotiations, he can push his own interests at the expense of the principal.

This is where so-called hidden actions come in, and a moral hazard may arise (Laffont and Martimort, 2009). “The leading candidates for such moral hazard actions are effort variables, which positively influence the agent’s level of production but also create a disutility for the agent” (Laffont and Martimort, 2009, p.145). These potential occurrences fall under the agency problem. Ross (2000) discusses highly theoretical scenarios that could allow for the agency problem to be solved; however, due to imperfect information a principal will in practice rarely know the agent’s so-called ‘fee-to-act mapping’. Ross (2000) also mentions the difficulty of monitoring the agent’s actions;; Laffont and Martimort (2009) support this as they point out:

“BY THE MERE FACT OF DELEGATION, THE PRINCIPAL OFTEN LOSES ANY ABILITY TO CONTROL THOSE ACTIONS THAT ARE NO LONGER OBSERVABLE, EITHER BY THE PRINCIPAL WHO OFFERS

THE CONTRACT OR BY THE COURT OF LAW THAT ENFORCES IT” (P.145)

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4.2 Money vs Legacy

In the literature review it was discussed how conflicts of interest can arise between a player and their agent. As previously cited, Laffont and Martimort (2016) discuss how agents may be inclined to forego certain projects that may be favored by the player, due to more personal payout for the agent. The example of Pogba’s transfer to Manchester United was given, managed by his agent Mino Raiola. As mentioned, Mino Raiola received fees from all parties. Now hypothetically, if one assumes that Pogba had two offers, the one from United and another one from say Bayern Munich, then it is possible to imagine a conflict of interest in practice. If Pogba prioritized winning titles consistently and competing for the Champions League title over playing in arguably the most exciting and lucrative league in the world, then Bayern would unquestionably be the better choice as they are 5-time consecutive German First Division champions and consistently reach the Champions League semi-finals. However, Raiola might prefer a move to Manchester United if they offer a higher salary, as they most likely do/did; also Juventus are likely to have pushed for whatever transfer would provide them the highest transfer fee.

While players are contractually tied to teams, and Juventus could have theoretically ‘forced’ Pogba to stay, typically team will opt to offload a dissatisfied player. Thus if Bayern had offered less than Manchester United, but Pogba insisted he would want to transfer to Bayern, Juventus would most likely eventually give in to the request provided Bayern’s offer exceeds a minimum price. The alleged bonus Juventus paid Raiola, is likely to have been a monetary incentive for Raiola to close the deal that would be most lucrative for Juventus. This example is hypothetical, but it is based on a real transfer; and it demonstrates the incentive Raiola, as the agent, may have had to potentially ‘sabotage’ any other negotiations with the end being the maximum payout for him, to the detriment of his principal. This illustrates how the interests of agents and clubs often conflict, and explains why agents often sabotage contract negotiations thereby driving up the costs for clubs (Rossi, 2010). Agents view their clients as a financial asset and thus they push their interests, which often involves getting a player transferred as often as possible, yet they are important for brokering purposes, and to minimize uncertainty – to managers they are 'necessary evil' (Rossi, 2010).

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18 Chinese club Tianjin Quanjian for 20 million Euros, he was about a week shy of 27 at the time (Aarons, 2017). Prior to his transfer, he was rumored to be a transfer target of numerous European elite clubs, such as Juventus, Chelsea, or Liverpool. It arguably was not the first time he seemingly picked money over legacy. In 2012, at the age of 21, he transferred to Zenit from Benfica Lissabon, despite being allegedly targeted by Manchester United, Real Madrid, and AS Roma (transfermarkt.co.uk)2_{. Some may}

argue that he had more prospective game time at Zenit, which may be true, but this game time would come in a peripheral league of Europe with less relevance intercontinentally.

4.3 Property Rights

Fama (1980) shares what he thought to be ‘striking insight’ of Alchian and Demsetz (1972) and Jensen & Meckling (1979) to portray the firm as a set of contracts among factors of production. This is complemented by the comparison of the firm to a team composed of members that act in self-interest, yet who rely to some extent on the team’s collective performance (Fama, 1980). These contracts among the factors of production essentially allocated the so-called property rights. Property rights are categorized into legal rights and economic rights, the former representing the means to the end that is the latter (Barzel, 2012). Another definition as brought forth by Libecap (1989) equates property rights with “the social institutions that define or delimit the range of privileges granted to individuals to specific assets” (p.1).

The majority owner of the rights to a property is referred to as the “residual claimant”, for example, the residual claimant to an apartment is the economic owner that benefits from an increase its value (Barzel, 2012). Legal property rights are subject to third-party enforcement and thus are the aforementioned means to appropriate the monetary ends generated from economic rights (Barzel, 2012). Contrarily so-called goodwill agreements are no supported by third-party enforcement (Barzel, 2012). Barzel suggests a close link between property rights and transactions costs; he defines transaction costs as “the costs associated with transfer, capture, and protection of rights” (p.4), the same definition Jensen and Meckling (1976) used for agency costs. The transaction cost depend to a high degree on the cost of obtaining information regarding the attributes of the property in question; if rights to the property are perfectly delineated, then information must be perfectly available according to Barzel (2012). He goes on to suggest that due to the cost associated with measuring property attributes, prospective owners will not fully know them and often neither do current owners.

To illustrate the points made above Barzel (2012) uses the example of National Football League (NFL) teams drafting college football players, as they do so they acquire exclusive negotiation rights including the right to transfer that player to any other NFL team. Barzel (2012) outlines the scenario in

2 _{Football transfers, rumours, market values, news and statistics. (n.d.). Retrieved from}

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19 which the 28 NFL teams (there are now 32 NFL teams) draft players in sequence, and explains the rationale behind the potential draft decision of the 20th_{team to pick:}

“GIVEN THE DIVERSITY OF BOTH PLAYERS AND TEAMS, THE PROBABILITY THAT THE TEAM WITH THE RIGHT TO THE TWENTIETH SELECTION WILL ALSO BE THE ONE PLACING ITS HIGHEST VALUE

ON ANY OF THE REMAINING PLAYERS IS THE SAME AS ANY OTHER TEAM’S, THAT IS, ONE IN TWENTY-EIGHT. WERE THE COSTS OF EXCHANGE AMONG TEAMS LOW, THE PROBABILITY OF

THAT PLAYER BEING TRADED WOULD THEN BE TWENTY-SEVEN IN TWENTY-EIGHT” (BARZEL, 2012, P. 5)

Barzel (2012) concludes the example by pointing out that newly drafted players are traded more seldom than suggested by his depiction. Simply put, the transaction costs are high as teams are not able to perfectly disentangle the suitability of each player to their franchise (despite the diversity of both) which results in a low trading frequency regarding newly drafted players.

4.4 Player and Asset

Demaziere and Jouvenet (2013) refer to a football player as ambivalent in a market-context, because to the club the player is not only an employee, but also a financial asset. Building on this definition of market ambivalence the player is at all times both an employee and asset, the manner in which the employer deploys his employee directly influences the financial value of the asset – in this case as a potential transfer-target. Demaziere and Jouvenet's (2013) definition of players as employees and financial assets, helps to understand the following idea put forth by Rossi (2010): “the various clubs in which players pass can be considered as production units expected to enhance the players as a commodity to sell by making profit” (p. 16).

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20 to build a relationship. The latter reason most likely represents a hidden action out of self-interest. However pundits and fans often assume that, any reason other than career-progression that leads to a transfer, is a transfer where the agent acts out of self-interest. The truth is though that many players prioritize different factors. Agents who may genuinely look out for their player’s best interest, may actually still face conflict with their player, if the player’s decision-making is not mature. For example, the player may want a move to a big club, despite the substantial risk of not receiving playing time. On the other hand, many players that were born into poverty prioritize money over legacy. In summary, agents pursue different strategies, and it is difficult to disentangle which ones genuinely look out for their player’s best interest.

Propositions:

4.4a Agents that prioritize profit in the short-term are more likely to perform hidden actions. 4.4b Agents that prioritize profit in the long-term are more likely to prioritize career progression and playing time, over short-term profits.

5 - Joint Value Creation

5.1 Stakeholder Relations

In their paper Bridoux and Stoehlhorst (2016) examine the role that the stakeholder relations play in joint value-creation, which is a process involving multiple parties possibly across firm boundaries. External stakeholders, such as suppliers, often possess valuable/important knowledge so that joint value-creation more often crosses firm boundaries (Bridoux & Stoehlhorst, 2016; Chesbrough, 2003; Cooper & Slagmulder, 2004).

When tasks and outcomes of a situation are interdependent, stakeholders face a public good dilemma in which joint value creation can be negatively influenced by the self-interest of certain stakeholders (Bridoux & Stoelhorst, 2016; Kollock, 1998; Olson, 1965). Bridoux and Stoelhorst cite Olson (1965) in that when stakeholders are focused on their personal payoffs, they tend not to contribute.

“ADOPTING STANDARD ECONOMIC ASSUMPTIONS, THESE SCHOLARS SEE THE PROBLEM OF ACHIEVING JOINT VALUE CREATION AS ONE OF ALIGNING THE INTERESTS OF SELF-INTERESTED

AGENTS, AND THEY SEEK SOLUTIONS IN ALLOCATING PROPERTY RIGHTS IN WAS THAT HELP OVERCOME THE TENDENCY OF SELF-INTERESTED AGENTS TO SHIRK (ALCHIAN & DEMSETY,

1972) AND TO UNDERINVEST IN ASSETS SPECIFIC TO THE TEAM (BLAIR & STOUT, 1998)” (BRIDOUX & STOELHORST, 2016, P.21)

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21 literature: Community Sharing, Authority Ranking, Equality Matching, and Market Pricing (Fiske, 1991, 1992, 2004, 2012; Fiske & Haslam, 2005; Haslam, 2004). These models act on a continuum from low levels of cooperation to high levels of cooperation, where the community sharing model contributes the most to cooperation while market pricing contributes the least (Bridoux & Stoelhorst, 2016). Furthermore, it is relevant whether or not the actor identifies with the collective or not; for example, it is argued that in a community sharing model the collective and individual interests are aligned (Bridoux & Stoelhorst, 2016).

On the other end of the spectrum there is the market pricing model, in which actors act independently and seek to maximize their own payoff perhaps at the expense of the collective (Bridoux & Stoelhorst, 2016). Bridoux and Stoelhorst describe the market-pricing model as one that is ‘mediated by contracts and regulated by prices’ (p.236) and where actors seek to achieve the ‘highest payoffs in return for the lowest contributions’ (p.236;; Fiske, 1991, 1992). The authors go on to cite reviewed literature (Bowles, 2008; Fuster & Meier, 2010) in that monetary incentives are an imperfect tool to align the interests of stakeholders, because individual contributions cannot be separated from the collective contribution (Bridoux & Stoelhorst, 2016; Alchian & Demsetz, 1972).

The overall expectation in regards to the market-pricing model is that contribution to the collective interest will only occur to the extent that it pays off personally (Bridoux & Stoelhorst, 2016). According to Bridoux & Stoelhorst (2016), and Mossholder et al. (2011), the market-pricing model is subject to reserve between the parties, which limits the relational depth, and trust. Furthermore, the stakeholders will question each other’s intentions, and this transactional nature of the relationship leads to less cooperation than would a relationship of communal sharing (Bridoux & Stoelhorst, 2016). With regards to the characteristics of the equity matching- and authority ranking relationships, Bridoux and Stoelhorst (2016) described the readiness of stakeholder’s to bear personal costs for the benefit of the collective, and that it was present in the aforementioned relationships but mostly so in the communal

sharing model (p.237).

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22 Joint Value Creation occurs at clubs when agents, clubs, and players, are working together to close deals that will benefit all sides. Ideally, agents are genuinely seeking the best solution based on their client’s interest, or attempting to identify the most suitable player for a club – depending on which party initiates the search. If say a promising youngster, who is playing in the second division, is asking his agent to seek a career progressive move, then all sides could benefit. The selling club would receive a fee for a player who would eventually depart anyway (based on the notion that the best talent eventually diffuses up the pyramid), the player would progress his career, the buying club received a squad enhancement, and the agent not only receives a fee but also increases the value of their asset. As such, it is appropriate to apply a relational model such as market pricing (Bridoux & Stoelhorst, 2016).

Market Pricing suits this scenario almost perfectly, as it is potentially a mutually beneficial transaction,

however typically none of the parties will incur unnecessary costs voluntarily. In conclusion, the agent may be inclined to deviate from their player’s best interest in the pursuit of profit, and thus makes it a very volatile relationship.

5.2 Aggressive vs Resourceful

When agents deal with clubs and players, there are two main types of network mechanisms, which they exercise in order to add value to the collective. Network Closure represents activities that involve accessing information from a closed network. Structural Holes on the other hand represent a gap between insulated groups in a larger network, and agents can create value by bridging these Structural Holes and accessing nonredundant information (Burt, 2017; 1999a/b). While information acquired across Structural Holes may be more novel, Network Closure provides more trustworthy information

(Burt, 2017; Coleman, 1988/1990). A club’s stature, and their position on the hierarchical pyramid, shape their modus operandi (MO) when recruiting players. This becomes observable in the way agents interact with a club, and the frequency with which they are able to place their clients at a club.

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23 unless that agent represents a given transfer target. As a result, they buy players and then negotiate with the respective agent. The clubs lesser in stature will often consult trusted agents in the hope of identifying less-known targets, who then consequentially would be more economic signings. While there is an observable pattern in how the financial power influences a club’s MO for recruitment, there are related aspects that are relevant such as recruitment strategies.

Recruitment strategies, or approaches, differ from club to club and are a function of financial endowment. Furthermore they directly influence how the network mechanism with which an agent can add the most value. Solberg and Haugen (2010) described the approach of going for the best players as ‘aggressive’ – this is an appropriate classification and will be adopted for this thesis. Based on the ideas above, an aggressive approach is more costly as the club seeks to sign established players to minimize uncertainty, as would be the case in the aforementioned example if Real signed Lewandowski. An aggressive approach does not always have to be synonymous for a transfer deficit, it simply means that clubs are able to approach more high-profile transfer targets and be competitive in the quest to sign them. However, this will more often than not mean higher spending due to fees and wages. In such a case where uncertainty associated with the player’s performance is minimal, but the stakes are higher, network closure provided by the agent is of high importance to all parties. As explained, Lewandowski left his agent despite already being in contact with Real, thus there was never a structural hole to begin with; it seems as though what Lewandowski actually needed was network closure and someone to establish trust in the negotiation.

5.2a The higher the club is on the pyramid, the less alternatives the club has to a given transfer target.

5.2b The higher the clubs involved in the transactions are in the pyramid, the larger the ratio of aggressive recruitments to resourceful recruitments.

5.2c Clubs pursuing an aggressive approach are less responsive to changes in price. 5.2d Aggressive recruitment requires more network closure by the agent.

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24 club aware of the player’s career plans. Moreover, in the case of a resourceful approach, clubs and agents are more likely to work together for an extended period, which is another reason network closure cannot be neglected. This way they can have a successful joint value creation, which could eventually include a transfer of the player for a lucrative fee. Alternately, a club can attempt to identify players from peripheral leagues that could enhance the squad; in which case the club would benefit from agent with extensive network bridges across structural holes. The club would import a high quantity of high uncertainty players, for a low cost, and rely on the statistical probability that few of those will represent legitimate enhancements. The more insulated groups (Lin, 2017) the agent can reach, the greater the number of potential sources of talent for the club to scout.

5.2e The lower the club is on the pyramid, the more time-consuming the recruitment process is.

5.2f The lower the clubs involved in the transactions are in the pyramid, the smaller the ratio of aggressive recruitments to resourceful recruitments.

5.2g Bridging structural holes increases in importance further down the pyramid.

5.2h The change in importance of network closure between the two approaches, is smaller than the change in importance of bridging structural holes.

5.3 Dortmund’s Evolution

Applying these approaches to the hierarchical food chain (Appendix 2), it can be said that in terms of recruitment, clubs towards the top of the food chain will pursue aggressive strategies while teams lower on the pyramid pursue more resourceful strategies. An aggressive strategy represents a less price-sensitive approach in which clubs will look to recruit the best players, with little regard for the costs. A resourceful strategy is often a result of limited financial means, and thus clubs have to be resourceful and creative in their scouting and recruiting. As would be the case for the previously discussed example of a smaller club systematically recruiting and developing young players to sell them for lucrative fees. Clubs towards the top not only pursue aggressive strategies because they predominately possess the financial means to do so, but only top-of-the-line players are likely to improve their squad (see Proposition 1.1). In practice, if Real Madrid were seeking an immediate squad enhancement, for example a player to improve their front line, it would arguably have only a few options. Thus while big clubs typically do employ scouts to discover talents ahead of the other elite clubs, they have no choice but to employ aggressive tactics when it comes to immediate squad improvements. In essence, the supply of squad improvements is scarce near the top of the pyramid, which explains the competitive labor market.

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25 spent less than 6 million Euros in the transfer window. Hence, they consulted German-agent, and former Dortmund player, Thomas Kroth; Thomas had excellent ties in Japan and employed his own talent scout there. Kroth’s ties to Japan represent a bridge across a structural hole, as Bundesliga clubs typically avoid recruiting from Asia because of a number of obstacles, mainly regarding the level of play and general connectedness. Kroth recommended Shinji Kagawa, who had just achieved promotion from the Second Japanese League – by no means a typical source of squad enhancements for top tier European clubs (Rother, 2012). Kagawa ended up becoming an established first team player and being instrumental in Dortmund’s two consecutive German First Division titles the following two years. Following these successes, Dortmund were able to pursue a more aggressive approach with a summer spending of 27 million Euros (in partial due to selling Kagawa for 16 million to Manchester United). Thus, Kroth bridged the gap between two more or less insulated networks (Lin, 2017) in Japan and Germany, to create value by matching an exceptional player with an ambitious, but resource-constrained, club in Europe. This new aggressive approach saw Dortmund sign young German forward Marco Reus for 17 million Euros. It can be reasonably assumed that a close tie to Kroth was not the initial reason for pursuing the transfer, more likely they approached his agent after deciding they would most likely want to sign him. In such a case the player’s talent does most of the work of convincing a club to sign him; however, agents still need to negotiate a contract with favorable remuneration and property rights (more on that later).

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26

6 - Conclusion

Clubs strive for the best possible performance on the pitch, and as they work towards that, they constantly seek to optimize their squad. Players meanwhile are looking to do what is best for their personal career ambitions, may that be ‘money or legacy’. Limited attention theory explains how players are overwhelmed with the different aspects of being a professional athlete. From the club’s point of view, the theory also accounts for the difficulty and cost associated with thorough screening of players’ talent and objectives. Athletic performance is quite subjective and thus screening can produce different verdicts. As exemplified in previous sections, there is uncertainty regarding not only a player’s productivity (performance), but also whether or not they can achieve their previous productivity at a new club. All in all recruitment is a proverbial minefield, which managers have to navigate in the pursuit of the ideal squad. This pursuit has resulted in an environment where players are approached from an early age on, leaving young players to deal with career planning all the while being expected to perform on a daily basis.

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27

7 - Appendix

Appendix 1 Sporting and financial ranking Scottish Premier League 2000/01 Season (Solberg & Haugen, 2010)

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Appendix 3 Social Capital as Assets in Networks (Lin, 2017)

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29

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