Transfer Deadline Day and Poor Incentive Alignment
The big news of Transfer Deadline Day was that Nathaniel Clyne turned down a move from The Eagles to The Wolves.* As The Guardian noted:
[This] will please everyone at Crystal Palace who isn’t an administrator.
Let’s look at the timeline and the reality.
- Palace was ninth in the
PremierChampionship [thanks to Tim in comments] League at the time they were put into Administration. (Owners could not pay bills.)
- Being put into Administration carries with it a 10-point penalty on the team. This moved them from ninth to twentieth—from in contention for
the FA CupCoca Cola Championship playoffs [ibid. to Tim] and possible Promotion to the borderline of Relegation.
UPDATE 2: The Eagles’s current FA Cup matchup—being one of five remaining Championship League teams in the Round of 16—is a replay today (3:00pm EST) with…the Wolves. Yes, the same team to which Clyne declined a transfer. Looking at the economics of today’s game (h/t My Loyal Reader), there is 90,000 quid to get through to the next round, and an expectation of 247,500 in additional revenues from that round. So the proposed 1.5MM transfer fee for Clyne and Moses has to be adjusted by the decrease in probability (from positive to virtually zero) of receiving that 337,500. Even if you assume only a 40% chance of winning at home, that’s an immediate 135,000 quid—9%—decline in the value of the sale.
- Note that the team itself did not change in the least at that point.
- This puts two factors into play: a relegated Eagles squad would be worth less, but the Administrators are looking for short-term cash flow that can best be achieved by selling top players. (We should call this a “borrowing constraint,” perhaps, save that it was the lack of an initial borrowing constraint and the resultant overextension that led to the situation in the first place, so perhaps it is a resource allocation issue.)
The strange thing is that, without the penalty, the incentives of the Administrators would be better-aligned with the long-term goals of the team: putting the best possible product on the field and selling an attractive commodity.**
Note, however, that the previous owners suffer no incremental reputational risk as the team is sold, even though they failed to prepare the
firm team for those next steps. (Think Sandy Weill and The Big C or Neutron Jack and the DoD-subsid[iar]y/mortgage lender.) The damage after their departure is borne solely by the players. In this particular case, Nathaniel Clyne’s move of support for the Eagles should be a stronger symbol for potential acquirers of the F.C. than the 1.5 million quid would have been.
*Dissent on this point from Tottenham supporters is understandable, if wrong. Yes, it was a boring day on the transfer front.
**This doesn’t mean that they might not still be trying to sell players, just that there wouldn’t be a “Fire Sale” sign on their foreheads, which should produce marginally better deals, i.e., those that are more closely aligned with the longer-term interests of the team.
UPDATE 1: Tim in comments notes, correctly, that Administration does, at least, pay the players, leaving transfer fees a possibility. The purpose of Administration remains, however, (1) keeping the League orderly and (2) being able to sell the franchise to other buyers for as much as possible. Since transfer fees are based on negotiation, and Administration (“fire sale”) prices seem by definition to be below those that would be negotiated if it were One’s Own Money.
So assuming one expects the Eagles to remain a Going Concern—that is, that Selhurst Park next season won’t be being developed into a Harrod’s—taking the transfer fee upfront is at best a wash, and more likely a reduction in the franchise’s value. Especially in a case where there is risk of Relegation.
You probably should delete & start again on this one, it is riddled with errors.
1)Palace are not in the Premiership, they are in the Championship (ie one division down)
2)Admistration has no effect on their place in the FA cup (which is a pure knockout competion)
3)If the players are not paid their conract become void and Palace will recieve no transfer fees
Like, who cares?