Revenue-sharing agreements in the live entertainment industry: a practical risk analysis framework

Revenue-sharing agreements are very common in the live entertainment industry. Such agreements typically include a minimum revenue guarantee for the benefit of the entertainer, combined with a formula to split the revenue, in case the revenue exceeds the minimum guarantee. In essence, these are derivative contracts between the event organizer (O) and the entertainer (E). This study introduces several closed-form expressions to evaluate the risks associated with these contracts for both parties (O and E). These expressions enable the estimation of revenue for each party based on the type of agreement and the valuation of the embedded option. Notably, the expressions do not require an assumption of symmetrical information-O and E can have access to different sets of information. Additionally, the expressions are valid regardless of the risk profiles of O and E, which could be different. Finally, the usefulness of the approach is demonstrated with an example that includes a scenario analysis, that is, exploring how variations in the two key parameters defining the revenue agreement affect the revenues of both O and E.