Upon Further Review: An Examination of Sporting Event Economic Impact Studies

As pointed out by Soonhwan Lee (2001) in a recent issue of The Sport Journal, there exists a great deal of debate about the validity of economic impact studies of sporting events. Economists widely believe that studies sponsored by leagues and events exaggerate the economic impact that professional franchises and large sporting events make on local communities. Such overstatement results from several factors.

First, the studies often ignore the substitution effect. To the extent that attendees at a sporting event spend their money on that event instead of on other activities in the local economy, the sporting event simply results in reallocation of expenditures in the economy, rather than in real net increases in economic activity. Next, the studies usually ignore the crowd out effect. Many large sporting events are staged in communities that are already popular destinations for tourists. If hotels and restaurants in a host city normally tend to be at or near capacity during the period in which a competition takes place, that contest may simply supplant, not supplement, the regular tourist economy. Third, the studies may fail to address whether money spent at a sporting event stays within the local economy. Much of the money spent by out-of-town visitors pays for hotel rooms, rental cars, and restaurants. To the extent that hotels, car rental agencies, and restaurants are national chains, their profits associated with a sporting event do not further the welfare of the local citizens, but rather accrue to stockholders around the country. Similarly, revenue from ticket sales is often paid to a league or to a sport’s ruling body instead of local organizers. Fourth, sporting events’ non-economic costs—traffic congestion, vandalism, environmental degradation, disruption of residents’ lifestyle, and so on—are rarely reported (Lee, 2001). Finally, since economic impact studies are often used by sports boosters to justify public expenditures on sports infrastructure, the ultimate question for anyone reading such studies is whether analysis conducted by agents with a vested interest in the research outcome can ever be considered an objective examination of events’ true economic impacts.

Empirical Analyses of Economic Impact Statements

It is one thing to point out bias that could potentially be introduced in impact studies. It is another thing altogether to examine whether actual economic impact studies are, in practice, truly flawed. One tool that can be used to determine the accuracy of economic impact studies is ex post comparisons of predicted economic gains to actual economic performance of cities hosting sporting events. Empirical studies have been conducted on the observed economic impacts of large sporting events as well as on the construction of new sport facilities.

On the sport facility side, numerous researchers have examined the relationship between new facilities and economic growth in metropolitan areas (Baade & Dye, 1990; Rosentraub, 1994; Baade, 1996; Noll & Zimbalist, 1997; Coates & Humphreys, 1999). In every case, independent analysis of economic impacts made by newly built stadiums and arenas has uniformly found no statistically significant positive correlation between sport facility construction and economic development (Siegfried & Zimbalist, 2000). This stands in stark contrast to the claims of teams and leagues, who assert that the large economic benefits of professional franchises merit considerable public expenditures on stadiums and arenas.

On the events side, nearly every national or international sporting event elicits claims of huge benefits accruing to the host city. For example, the National Football League typically claims an economic impact from the Super Bowl of around $400 million (National Football League, 1999), Major League Baseball attaches a $75 million benefit to the All-Star Game (Selig et al., 1999), and the NCAA Final Four in Men’s Basketball is estimated to generate from $30 million to $110 million (Mensheha, 1998; Anderson, 2001). Multi-day events such as the Olympics or soccer World Cup produce even larger figures. The pre-Olympics estimates for Atlanta’s Games in 1996 suggested the event would generate $5.1 billion in direct and indirect economic activity and 77,000 new jobs in Georgia (Humphreys & Plummer, 1995).

In many cases, variation in the estimates of benefits alone raises questions about the validity of studies. A series of economic impact studies of the NBA All-Star game produced numbers ranging from a $3 million windfall for the 1992 game in Orlando to a $35 million bonanza for the game three years earlier in Houston (Houck, 2000). The ten-fold disparity in the estimated impact of the event in different years serves to illustrate the ad hoc nature of these studies. Similarly, ahead of the 1997 NCAA Women’s Basketball Final Four, an economic impact of $7 million was estimated for the local economy in Cincinnati, while the same event two years later was predicted to produce a $32 million impact on the San Jose economy (Knight Ridder News Service, 1999). Such increases cannot be explained by changes in general price levels or growth in the popularity of the tournament. Instead, they are explained by the fact that economic impact studies are highly subjective and vulnerable to significant error as well as manipulation.

In further cases, the size of an estimate can strain credulity. The Sports Management Research Institute estimated the direct economic benefit of the U. S. Open tennis tournament in Flushing Meadows, NY, to be $420 million for the tri-state area, more than any other sporting or entertainment event in any city in the United States; this sum represents 3% of the total annual direct economic impact of tourism for New York (United States Tennis Association, 2001). It is simply impossible to believe that 1 in 30 tourists to New York City in any given year are visiting the city solely to attend the U. S. Open. Similarly, the projected $6 billion impact of a proposed World Cup in South Africa in 2006 would suggest that soccer games and their ancillary activities would represent over 4% of the entire gross domestic product of the country in that year (South Africa Football Association, 2000).

As in the case of sports facilities, independent work on the economic impact of mega–sporting events has routinely found the effect of these events on host communities to be either insignificant or an order of magnitude less than the figures espoused by the sports promoters. In a study of six Super Bowls dating back to 1979, Porter (1999) found no increase in taxable sales in the host community compared to previous years without the game. Similarly, Baade and Matheson (2000) found that hosting the Super Bowl was associated with an increase in employment in host cities of 537 jobs, for a total impact of approximately $32 million, less than one-tenth the figure trumpeted by the NFL. In a study of 25 Major League Baseball all-star games held between 1973 and 1997, Baade and Matheson (2001) found that, in the case of three all-star games in California (1987, 1989, 1992), the events were correlated with worse-than-expected employment growth in host cities and were furthermore associated with an average reduction in taxable sales of nearly $30 million. Finally, Baade and Matheson’s examination (1999) of the Olympic Games held in Los Angeles in 1984 and Atlanta in 1996 found total observed increases in economic activity of $100 million and of $440 million to $1.7 billion, respectively. While the range of the economic impact for Atlanta exhibits a great deal of uncertainty, even the most favorable figure is only one-third of the amount claimed by the host committee.

Discussion and Recommendation

There are theoretical reasons to believe that economic impact studies of large sporting events may overstate those events’ true impact. In addition, evidence suggests that in practice the ex ante estimates of economic benefits far exceed the ex post observed economic development of communities that host mega–sporting events or stadium construction. The best recommendation is simply for cities to view with extreme caution any economic impact estimates provided by sports franchises, sponsoring leagues, or event-organizing committees.

References

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