Foundation Briefs Advanced Level September/October Brief Resolved

The Downside of Mega-Events

Independent studies of the economic impact of spectator sports have cast doubt on the promises of significant financial gains accruing to host cities. A typical ex ante economic impact study used by league and event promoters estimates the number of visitors an event or team is expected to draw, the number of days each spectator is expected to stay in the city, and the amount each visitor will spend each day. Combining these figures, an estimate of the “direct economic impact” is obtained. This direct impact is then subjected to a multiplier to account for the initial round of spending recirculating through the economy, and this additional spending is known as “indirect economic impact.” The sum of the direct and indirect impact is the total economic impact.

While such an estimation method is relatively straight-forward, numerous academic articles such as Crompton (1995) and Baade, Baumann, and Matheson (2008), to name just two, have pointed out the shortcomings of such ex ante studies. In summary, the general criticism of impact studies is that while they may do a credible job in determining the economic activity that occurs as a result of a sports team or mega-event, they rarely account for economic activity that is displaced due to sporting events. In other words, economic impact studies typically measure gross economic activity rather than net activity and therefore bias upward the true impact of an event on the local economy

Ex post studies find little benefit from subsidizing professional athletic programs. JCD

Numerous studies have looked back at the actual performance of economies that have had professional franchises, built new playing facilities, and hosted mega-events and have compared the observed economic performance of host cities to that predicted in ex ante studies. These ex post analyses of stadiums and franchises, including Rosentraub (1994), Baade (1996), Siegfried and Zimbalist (2000), Coates and Humphreys (1999; 2003), and Baade, Baumann, Matheson (2008) among others, generally find little or no economic benefits from professional 3sports teams or new playing facilities. Studies of mega-events, such as Porter (1999), Baade and Matheson (2001; 2004; 2006), Coates and Humphreys (2002), Coates (2006), Coates and Depken (2006), and Baade, Baumann, and Matheson (2008), similarly uncover little relationship between hosting major sporting events and real economic variables such as employment, personal income, personal income per capita, and taxable sales.

Large scale sporting events carry steep price tags. JCD

Coates, Dennis. "Mega-Events and Housing Costs: Raising the Rent While Raising the Roof?" College of the Holy Cross, Feb. 2009. Web. 26 Aug. 2014.

These premier events, however, often carry very high price tags. The governing bodies of sports such as the International Olympic Committee (IOC), the Fédération Internationale de Football Association (FIFA), or the National Football League (NFL) insist on state-of-the-art playing facilities and first-class accommodations for athletes, officials, and spectators. For example, in order to host the 2002 FIFA World Cup, South Korea built ten new stadiums at a cost of nearly $2 billion, and Japan constructed seven new stadiums and refurbished three others at a cost of at least $4 billion. The total investment for new infrastructure in Japan for the event was estimated by some analysts at more than 750 billion yen ($5.6 billion) (Baade and Matheson, 2004).

In addition, as these events attract worldwide attention, they also become targets for terrorist activities, as witnessed at the Summer Olympics in Munich in 1972 and in Atlanta in 1996, and therefore security requirements are also very high. Greece reportedly spent $1.5 billion on security alone for the 2004 Summer Olympics (Meeks, 2004), and security restrictions in Beijing in 2008 “appear to have virtually eliminated any boost in tourism from the Olympics.” (Baker, 2008) Thus, cities incur not only large capital expenses in conjunction with hosting large sporting events, but the operating costs can also be astronomical.

In general, while league-sponsored estimates may do a credible job in determining the economic activity that occurs as a result of a mega-event, they usually do a poor job of accounting for economic activity that is displaced by these games and often apply incorrect multipliers. For these reasons, numerous studies have looked back at the actual performance of economies that have hosted mega-events and have compared the observed economic performance of host cities to that predicted in ex ante studies. Ex post analyses such as Porter (1999), Baade and Matheson (2001; 2004; 2006), Coates and Humphreys (2002), Coates (2006), Coates and Depken (2006), Hagn and Maennig (2007a; 2007b), Jasmand and Maennig (2007), and Baade, Baumann, and Matheson (2008), similarly uncover little relationship between hosting major sporting events and real economic variables such as employment, personal income, personal income per capita, and taxable sales.

No existing evidence supports the claim that tourism increases in the long term from major sporting events. JCD

Coates, Dennis. "Mega-Events and Housing Costs: Raising the Rent While Raising the Roof?" College of the Holy Cross, Feb. 2009. Web. 26 Aug. 2014.

Sports backers also suggest that sporting events serve to publicize host cities to prospective tourists. As noted by Matheson (2008), “Sports fans may enjoy their visit to the city and return later raising future tourist revenues for the area. Corporate visitors, it is claimed, may relocate manufacturing facilities and company headquarters to the city. Television viewers might decide to take a trip to the host city at some time in the future based on what they see during the broadcast of the mega-event. Finally, hosting a major event might raise perceptions of the city so that it becomes a “major league” or “world class” city and travel destination. All of these claims are potentially true although little empirical research has conclusively demonstrated any long-run connections between hosting mega-events and future tourism demand, and there are not even any anecdotal examples of companies moving corporate operations to a city based on the hosting of a sporting event.”

Empirically, the 1988 Winter Olympics did increase the worldwide name recognition of Calgary, but the effect was short-lived (Ritchie and Smith,1991). Similarly, the aftermath of the 1994 Winter Olympic Games did not bring a sustained boost in tourism to Lillehammer, but instead, 40% of the full-service hotels in the town soon went bankrupt (Tieglund, 1999).

Furthermore, while mega-events clearly shine the limelight on host cities, not all the publicity generated is necessarily positive. For example, the riots following Detroit’s National Basketball Association championships in the early 1990s did little to improve the city’s status, and the bribery scandal that surrounded award of the 2002 Winter Olympics to Salt Lake City similarly tarnished that city’s reputation. Likewise, the international images of Munich and Atlanta were marred by the terrorist events that occurred during their respective Summer Olympic Games.

Contingent valuation studies of professional sports franchises (Johnson, Groothius, and Whitehead, 2001; Johnson, Mondello, and Whitehead; 2006), stadiums and arenas (Groothius, Johnson, and Whitehead, 2004), and mega-events (Atkinson, et al., 2008; Walton, Longo, and Dawson, 2008) identify a willingness to pay for sports teams and events that is not simply captured in ticket sales. These identified intangible benefits, however, are generally smaller than the taxpayer contributions to stadium construction or event subsidization. Maennig (2007) analyzes the 2006 World Cup in Germany and similarly concludes that claims of “increased turnover in the retail trade, overnight accommodation, receipts from tourism and effects on employment [are] mostly of little value and may even be incorrect. Of more significance, however, are other (measurable) effects such as the novelty effect of the stadiums, the improved image for Germany and the feel good effect for the population.” (Maennig, 2007, p. 1)

Tu (2005) estimated the impact of FedEx Field in Maryland, just outside of Washington, DC, on the property values around that venue using actual sale prices before and after construction in a differences-in-differences analysis. Ahlfeldt and Maennig (2007) evaluate the impact of three venues in Berlin on property values using a hedonic 7price model. Feng and Humphreys (2008) use spatial econometrics to assess the effects of venues in Columbus, Ohio on property values in that city. The common link among these papers is that they focus on properties in a single community and proximity to specific sports facilities. In each of them, there is evidence that properties closer to the sports venues are priced differently than otherwise identical venues farther from the stadium or arena. These studies, therefore, estimate the extent of local externalities or spillovers from sports facilities in the same way that one might consider the spillovers from proximity to a noxious facility, like a prison or hazardous waste treatment facility

(Boyle and Kiel, 2001). Moreover, the conclusions are quite consistent with the argument against stadium and arena subsidies that stadiums do not generate large area wide benefits but rather induce concentrated benefits in a small area close to the venue.

The rise of rent prices is not a good indicator of the effect of sports teams. JCD

Coates, Dennis. "Mega-Events and Housing Costs: Raising the Rent While Raising the Roof?" College of the Holy Cross, Feb. 2009. Web. 26 Aug. 2014.

Of course, cities with professional teams are generally larger metropolitan areas, which offer many other cultural attractions for which renters would also be willing to pay a premium. Indeed, Coates, Humphreys and Zimbalist (2006) find that Carlino and Coulson’s results are highly dependent on model specification;

First consider the uninteracted event variables, the first nine rows of the column, across the four models. None of the Super Bowl variables is remotely statistically significant, indicating that a) there is no market anticipation of the benefits of the Super Bowl in the year prior to the event, b) there is no evidence of the rental market being tighter in the year of the Super Bowl, and c) after the Super Bowl there is no residual impact on the rental market. If hosting the Super Bowl affects the rental housing market in an SMSA, it is not apparent in these regressions.

The effect of hosting the Winter Olympic Games in Salt Lake City contrasts completely with the Atlanta results. Without central city interactions, neither the year before nor the year after the games is statistically different than other observations in our data. However, once the interaction terms are included, the evidence is that central city Salt Lake housing units have higher rents both before and after hosting the games, and rents outside Salt Lake City but still in the Salt Lake SMSA are lower than elsewhere prior to the games but no different afterwards

In Atlanta, the Centre on Housing Rights and Evictions argues, in Atlanta’s Olympic Legacy: Background Paper (2007), that the Olympics served as a catalyst for gentrification of downtown Atlanta at the cost of losses of hundreds of rental units for low and moderate income individuals and families. Given the destruction of such a large number of units, we would expect rents to rise. However, many of these units were in public housing and it may be that individuals displaced from these units were too poor to effectively bid up rents on the existing or newly developed units. Alternatively, and consistent with our results, perhaps these displaced city dwellers moved out of the city 17but remained within the Atlanta SMSA. A large loss of demand in the city would force rents down, while the exodus to the suburbs would tend to bid up rents there. Moreover, if the gentrification produced an increase in the number of rental units for middle and upper middle class families that would cause the price of such units to come down.

This paper examines the relationship between hosting mega-events such as the Super Bowl, Olympics, and World Cup and rental housing prices in host cities. If mega events are amenities for local residents, then rental housing prices can serve as a proxy for estimating residents’ willingness to pay for these amenities. An analysis of rental prices in a panel of American cities from 1993-2005 fails to find a consistent impact of mega-events on rental prices. When controls are placed on the regression models to account for nationwide annual fluctuations in rental prices, mega-events generally exhibit little impact on rental prices in cities as a whole and are as likely to reduce rental prices as increase them. Somewhat stronger evidence exists, however, that mega-events affect rental prices outside of the center city in a fundamentally different manner than in the city core.

If the process were rational, each local organizing committee would have a notion of how much their city stood to benefit financially from the games and would cap their bid below that dollar figure. Since the Olympics are likely to generate roughly similar amounts of business activity in any given city, the competition among would-be hosts would drive all of their proposals up to the limit, and whichever town was chosen would reap close to zero net benefit from the event.

Local committees, however, invariably are motivated and run by private business interests which individually stand to gain from the massive construction associated with the events. These interests include construction companies, construction unions, architectural firms, investment bankers, and lawyers, among others. They come together to form a coalition and bring politicians on board.
A conflict of interests arises when bidding for the Olympics. JCD

Zimbalist, Andrew. "3 Reasons Why Hosting the Olympics Is a Loser's Game." The Atlantic. Atlantic Media Company, 23 July 2012. Web. 26 Aug. 2014.

The result is what economists call a principal/agent problem. The city (principal) is not properly represented by the local organizing committee (agent). The committee that nominally represents the city really represents itself and bids according to its sense of the private benefit (of its members) versus the private cost, rather than the city's public benefit versus public cost.Since the private cost is diminutive and the private gain extraordinary, the local organizing committees, on behalf of the cities, are bound to overbid, wiping out any modest, potential economic gains.

Meanwhile, during the bidding process cities spend tens of millions of dollars to win the hosting competition. Chicago spent a reported $100 million in its losing campaign to host the 2016 summer games.
Benefits to bipartisanship in local governments are rather limited in scope. JCD

Zimbalist, Andrew. "3 Reasons Why Hosting the Olympics Is a Loser's Game." The Atlantic. Atlantic Media Company, 23 July 2012. Web. 26 Aug. 2014.

Such a potential benefit is more alluring to a less developed city, such as Athens, than to a fully developed and congested city, such as London or New York. Athens, after all, lacked a modern communications infrastructure and had significant deficiencies in its transportation infrastructure.

The challenge here is that the environment in which the preparations for the Games takes place is not conducive to rational, effective planning. Sports venues and stadiums must be built and infrastructure serving those edifices takes priority. The other challenge is that the budget, initially bloated, only grows over time as construction costs escalate over the ten-year preparation period, bells and whistles are inevitably added, and initial drawings are revealed to be overly optimistic.

Once the 17-day extravaganza is over, the city must then attempt to find productive use of the dozens of venues it has built. These projects often cost hundreds-of-millions of dollars to construct, take up 10 to 20 acres of valuable urban real estate (frequently for decades), and cost tens-of-millions of dollars to maintain each year. Despite this, many of these former Olympic venues are scarcely used, as is the case with Beijing's Bird's Nest and Water Cube, or many of the venues built for the Athens games. The list of white elephants is long.

These days the summer Games might generate $5-to-6 billion in total revenue (nearly half of which goes to the International Olympic Committee). In contrast, the costs of the games rose to an estimated $16 billion in Athens, $40 billion in Beijing, and reportedly nearly $20 billion in London. Only some of this investment is tied up in infrastructure projects that may be useful going forward.

The high costs are bound to make hosting the Olympics a bad deal in the short-run. Promoters, however, claim that there is a strong benefit that accrues over time connected to the advertising effect of hosting the games. The idea is that the hundreds of hours of television exposure to hundreds of millions of viewers around the globe will generate increased tourism and business for the city.

It's a lovely idea, but there is little evidence that it pans out. Whether or not the city receives a positive PR boost from the TV exposure itself is uncertain. Should the Games be plagued by disorganization (e.g., the current security snafu in London), the pervasive pollution of Beijing, the violence of Munich, Mexico City or Atlanta, or the corruption scandals of Salt Lake City and Nagano, then the PR effect might be negative. Further, many of the host cities are already well-known as tourist destinations around the world and the notion that hosting the Olympics will put them on the map is about as implausible as Mitt Romney calling for national health care.

Tourism is not increased during the Olympics but rather it displaces the usual crowds in already popular tourist destinations. JCD

It should be added that there is little evidence that tourism increases during the Games. Rather, Olympic tourists replace normal tourists who want to stay away to avoid the congestion and greater expense during the Games.

The cost of hosting major sporting events is huge. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

President Vladimir V. Putin stoked the debate when he recently told a group of television anchors that Russia had spent only 214 billion rubles, or roughly $7 billion, to erect the sporting venues for the games. And less than half of that, he maintained, was government spending.

The cost of hosting major sporting events is grossly understated. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

Mr. Putin’s figure was, Mr. Navalny said, “a lie of an absolutely absurd scale.” It is not only one-tenth of the spending that has been widely reported, but it is also less than the $12 billion Mr. Putin pledged in 2007 to spend on the games when he personally appealed to the International Olympic Committee to choose Sochi as the host.

The costs of hosting major sporting events is underreported. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

Officials here once boasted of Russia’s ability to spend so lavishly, but of late they have embraced Mr. Putin’s more frugal tone, and have sought to defend the outlays by redefining what constitutes spending on the Olympics. They have argued that the billions poured into projects like the huge new power plant on the edge of the Olympic Village or the adjacent new railroad station should not be counted as Olympic expenditures, but rather as part of a broader economic stimulus project to rebuild the sea-meets-the-mountains resort on the Black Sea.

The cost of hosting largescale events continues to rise. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

According to the group’s calculations, Russia has spent more than 1.5 trillion rubles on the Olympics, which at today’s suddenly declining exchange rate would amount to at least $48 billion — more than China spent for the far larger Summer Olympics in 2008.

While that figure is roughly comparable with a $50 billion estimate that Russian officials here disclosed a year ago and then quickly disavowed, the group’s calculations are based on detailed accounting of project costs that have remained largely opaque, perhaps on purpose.

Hosting the Olympics leads to other extraneous spending with little long term gains. JCD

Mr. Navalny argued that beyond the most visible projects, like the stadiums and arenas, the government also spent heavily on buildings that had nothing to do with the Olympics or even with future tourism in Sochi. They include new residences for Mr. Putin, a church at the Olympic Village, and resorts for various agencies like the prosecutor’s office and the Federal Security Service, all classified in the annual budgets as Olympic projects.

Private business donations to hosting major events are rather limited. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

Mr. Navalny challenged the Kremlin’s assertions that much of the spending was private, not government. When Mr. Putin said that less than half of the figure he cited was federal money, he sidestepped the fact that many of the largest “private” expenditures were made by companies that are state-owned, like Russian Railways, the state bank and Gazprom, Mr. Navalny said. According to his organization’s analysis, less than 4 percent of the overall spending came from truly private companies.

The Olympic economic effect is a myth. JCD

Myers, Steven Lee. "Russians Debate Sticker Price of Sochi Games." The New York Times. The New York Times, 26 Jan. 2014. Web. 26 Aug. 2014.

Mikhail G. Delyagin, an economist in Moscow, said in an interview that as a rule, the Olympic Games rarely prove to be the engines of economic revival that officials claim. “The situation in Sochi is indeed positive, because there wasn’t even a normal sewer system there,” he said, “but one shouldn’t expect that these resorts will recoup the cost.”

Forecasts on the effects of the Olympics are unreliable. JCD

Sivaev, Dmitry. "A Year On: An Update on the Economic Legacy of the London 2012 Olympic and Paralympic Games." Centre for Cities. N.p., Oct. 2013. Web. 26 Aug. 2014.

The report claims that by 2020 the economic impact of the Games will have added over £28 billion to economic output and created over 600,000 years of employment.7 The methodology and assumptions behind these numbers are one potential cause for concern, but it is more significant that public officials are focusing on numbers rather than actions. The Olympics are not and have never been an investment project with decisions based on expected returns, and the majority of benefits that the Olympics deliver are intangible. A view of the Olympic legacy that focuses on GVA gains only, does not reflect the wider benefits that the Olympics can deliver and suggests a more short-term view of the legacy as a whole. A Government action plan that sets out how to make the most of various economic benefits of the Olympics in the years ahead would be more helpful in the longer term than the benefit forecasts.

Most of the cost is put on the government. JCD

The methods used to measure the Olympics success economically is misleading. JCD

The Vancouver games were incredibly costly. JCD

The debt following the Vancouver Olympics is crippling. JCD

Only small cities get a boost from mega events DAT

There are individual cases where mega-events do seem to have major influence on future demand, but it appears that a “perfect storm” is needed. Cities that are already on everyone’s map, London for example, gain little in exposure from a major event since they are already at nearly maximum exposure. Other cities such as Atlanta or many Winter Olympics hosts also gain little from exposure because the cities have little to offer potential tourists after their events. Advertising without a subject to advertise is likely to be an exercise in futility. Under very specific conditions, however, a “hidden gem” can raise its international profile by hosting a major event. This appears to have been the case with Barcelona, a city with great artistic, cultural, and architectural treasures, but also a city long overshadowed by European capitals such as Madrid, Rome, London, and Paris, as well as 40 years of fascist rule. By 2012, twenty years after their moment on the world stage, Barcelona was the fourth most visited city in Europe. Barcelona’s tourism experience, however, has not been replicated in the majority of Olympic hosts. Brazil in general, and Rio in particular, offer unparalleled travel opportunities for tourists, but may have been underutilized as vacation destinations by world travelers. In is possible that Brazil’s upcoming moments in the spotlight could bring long-run increases in global tourism, but it is important to note that Brazil in incurring very certain costs today for very uncertain future benefits.

It remains a widespread belief among countries that there are substantial national gains to be made from hosting these global events, but the evidence indicates that this is rarely the case. Samuel Johnson once wrote that second marriages reflect “the triumph of hope over experience.” Such thinking also pervades the vigorous competition among countries to host these exciting but economically questionable events.

Big events tend to go to big cities, which often precludes the “perfect storm” situation described in this card.