The Impact of Financial Regulations on Competitive Balance: In the Case of Formula One

Abstract

This thesis investigates how financial regulations impact competitive balance in motorsports using empirical evidence from Formula One between 1998 and 2023. In 2021, Formula One introduced a new set of financial regulations, capping the costs that teams can incur in developing their cars. First, the thesis adopts qualitative methods in analyzing the teams’ perception of the cost cap. Secondly, quantitative methods are applied in analyzing race performance data from all races between 1998 and 2023. Specifically, the analysis is conducted across three dimensions of competitive balance: within race, within season and inter season using multiple regressions, normalized HHI and Spearman Rank Correlation Coefficient. The results indicate that financial regulations’ effect on competitive balance is ambiguous but find no evidence of it being effective in increasing the competitive balance across any of its dimensions. Findings are largely affected by changes to the regulatory environment in Formula One, specifically the technical regulations. Following the implementation of the cost cap in 2021, a new set of technical regulations was introduced in 2022, thus obscuring the interpretation of the cost cap’s impact on competitive balance.
The thesis applies new adjustments to methods in analyzing the competitive balance in motorsports. Moreover, the findings provide valuable insights for the administrators of Formula One in understanding how competitive balance is impacted by the imposed financial regulations. Finally, due to the novelty of the financial regulations, it is argued that conducting future research in this field may reveal other findings.