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Business News/ Opinion / Fixing the IPL, an economics view
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Fixing the IPL, an economics view

Right incentives and not tougher laws are the solution to the problem of fixing and corruption in Indian sport

A file photo of an IPL match. Photo: HTPremium
A file photo of an IPL match. Photo: HT

If it ain’t broke, don’t fix it is an old adage. By this, we most certainly need to fix the Indian Premier League (IPL) as there is significant suspicion, and some concrete evidence, that its organizational structure is broken. Expectedly the government has responded by suggesting stronger laws to deal with sports-related frauds. Surprisingly (or may be not-so surprisingly), sports administrators and corporate bodies have called for legalizing sports-related betting as a solution to the problem.

It is true that legislating unambiguous rules that enunciate the penalties and punishments will certainly lead to better conduct of all persons involved and improve the level of fairness in the sport. Legalizing sports-related betting activities, however, can only effect partial improvements without fundamentally addressing the underlying issues related to the fraudulent behaviour of the persons involved in running the IPL.

The controversy has attracted reactions from politicians to political scientists, from socialists to sociologists and from public administrators to the public. There is, however, an economic angle to this tangle. Economists have over the past 30 years developed principal-agent and contract theories that look at conflicts of interest in a wide array of situations. These suggest few (but probably incomplete) ways to handle the latest crisis in cricket.

IPL is a big sports organization involving layers of agents, such as the Board of Control for Cricket in India (BCCI), IPL administrators, cricketers, umpires and other relevant staff, that are mandated to entertain their sole principal, the cricket-loving population. As in the well-known principal-agent problem, the issue on hand is how to make-sure the all agents are behaving “fairly". The situation is actually more complex than the textbook version of the principal-agent problem, with multiple principals and multiple agents. Let us assume that the government is a single representative-principal of the population (not a bad assumption to make in a democracy). Now we have multiple agents and we need to devise a contract between the government and layers of these agents. Any contract between two (or more) parties will involve the specification of legally tenable rules along with incentives for agents to efficiently implement that mandate. Creation of a legally clear framework is the prerogative of the government. But that is in itself insufficient to ensure an optimal outcome since we need to make sure agents are sufficiently incentivized to follow those rules in letter and spirit.

As we know from the concept of costly state verification in contract theory (due to famous economist Robert Townsend), in a world of incomplete information where the principal does not have complete information about agents’ possible actions, it is prohibitively costly to externally monitor the correctness of an agent’s behaviour all the time. For example, it is almost impossible even for a cricket administrator (let alone police) to tell whether a bowler has purposely bowled a bad over or it is just a good batting skill at display (and vice-versa). In such situations, optimal design of incentives for all layers of agents is a way of enforcing good behaviour. A strong legal framework and fear of the law will be a disincentive to act unfairly, but designing performance-related incentives are likely to encourage fair play.

Consider the following proposal: let BCCI and all franchises of IPL be listed and traded public limited companies (bringing them to the same level of corporate governance scrutiny as any other listed company) with their share prices reflecting their performances as defined or desired by the stockholders (these could be institutions and/or the general sports-loving public). Let the franchises of IPL reward all their players with hefty compensations as they are doing through their current auctions, but with a clause that their compensation will be awarded in deferred manner over next three-five years with half or more of the compensation in stocks of that franchise, and a claw-back option by which they could call back all of the payments made if a player is found to have brought disrepute to the game. The sports administrator (say BCCI) should devise a contract with franchises under which the latter will be slapped with a monetary penalty equal to the total amount of money paid to the entire team by the franchise if any player is found to be involved in any fixing episode. This will sufficiently incentivize the franchises to monitor the activities of their players. Franchises, in turn, can impose monetary penalties on players using their claw-back option.

More powerful is the market-valuation aspect. Given that stocks of each of the franchises are publicly traded, if the public is disappointed with either the performance or behaviour of the players (and administrators) of a franchise, it will punish them with lower valuation of stocks by selling them off. This will immediately affect the fortunes of all the players who get that stock as compensation. This will incentivize all players to be sensitive about what is going on around them and enforce self-regulatory behaviour by the team. This will also facilitate a transparent way of valuation and transfer of ownership of players and franchises.

Designing incentive-compatible contracts for all agents involved in IPL is the key to effective enforcement of the letter and spirit of the laws.

Gangadhar Darbha works for an investment bank in Mumbai. These are his personal views

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Published: 06 Jun 2013, 05:04 PM IST
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