Transcript The Public Finance of Sports: Who Benefits and How?

The Economics of Sports
FIFTH EDITION
Chapter 6
The Public Finance
of Sports: Who
Benefits and How?
MICHAEL A. LEEDS | PETER VON ALLMEN
Building Stadiums
• Cities dream that a new stadium will work wonders
• They hope that it will attract new tourists who will
– Generously spend before, during, and after the game and
see other points of interest in the city
• They see this as a way to revitalize old cities
• They hope that fans will identify with the team
• “New” is a key word
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Learning Objectives
• Show how a new facility can increase a team’s
revenue stream
• Recognize how new facilities might make fans
better off even if they never attend a game
• Appreciate how new facilities, new teams, or new
events might contribute to a local economy—and
why they generally add little.
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6.1 Teams Benefit From New Facilities
• Construction costs for football and baseball stadiums now
approach or exceed $1 billion
– Even basketball arenas cost over $600 million
• Ebbets Field, a extravagant structure, cost $750,000 when
it was built in 1913
– Accounting for inflation, this is equivalent to a little over $17
million in 2011
– Something has changed!
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Facilities, Attendance, And Profits
• New facilities could attract people to the city
• Baltimore Orioles and Cleveland Indians attendance
surged at first
– Their retro parks became very fashionable
• The surge did not last for either team
– Attendance in 2011 was lower than in its last year at the
previous park
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The “Honeymoon Effect”
• Studies show that a new park brings higher
attendance for about 10 years in baseball
• The effect is shorter for other sports
– Baseball games do not typically sell out, so there is
more room for growth
• Eventually, attendance is a result of wins
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Facilities, Attendance, And Profits
• The new Yankee Stadium drew fewer fans when it opened
in 2009
– The depths of the recession
– Nevertheless, ticket revenue rose
• Ticket prices were much higher
• This indicates low price and income elasticities
• The biggest impact of a new facility is typically on the
number, size, and price of luxury boxes and other special
seating
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LUXURY BOXES
• NFL teams retain most of the revenue from luxury boxes
• The average NFL team has 140 luxury boxes,
– Over 50 percent more than in the NHL, which has the
second most boxes
• The NFL’s reliance on luxury seating is still growing
– Table 6.1 shows financial and luxury seating information for
the five most valuable NFL teams in 2010
– They also have the five highest revenue streams
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Table 6.1
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6.2 How Fans Benefit
• We distinguish between fans and cities
– Cities benefit from jobs, income, and tax revenue
– Fans benefit from rooting for the home team
• Fans’ benefits are often intangible
– Attending a game in a new facility
– Following the team even if they never attend a game
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Size And Shape Of Baseball And
Football Stadiums
• In this section, we show how the size and shape of
baseball and football have changed over the last 30 years
• Baseball stadiums have shrunk
• Football stadiums have grown
• Baseball and football now have separate facilities
• Table 6.2a lists capacities of shared stadiums in 19611982
• These large facilities were all similar and round
– Cookie-cutter shape
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Table 6.2A
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Separate Facilities
• Table 6.2b lists capacities of separate facilities
• The size of baseball stadiums fell by about 10,000
• The size of football stadiums rose by about 10,000
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Table 6.2B
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Sea Change
• Until the 1960s, most football teams were tenants in
stadiums built by baseball team owners specifically to
house their teams
• By the 1960s, football had become increasingly popular,
and municipalities were paying much or all of the
construction cost
– They chose to construct multipurpose stadiums
– The size of the multipurpose stadiums was thus a
compromise , too large for baseball and too small for football
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Shape Depends On The Game
• Football teams play on a standardized, rectangular field
• The bulk of the action takes place in the middle of the field
• Seats at either end of the field give little perspective on the
action and provide a poor view of most plays
• See Figure 6.1 for an ideal shape of a football stadium
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Shape of a Baseball Field
• Most of the action on a baseball field takes place within the
diamond that forms the infield
• Best view is from a grandstand that extends outward from home
plate along the foul lines
• Figure 6.2 shows the ideal shape for a baseball field
• In contrast, Figures 6.3 show a multipurpose stadium
– It satisfies neither the football nor the baseball fan
– Figure 6.3a shows the facility configured for baseball
– Figure 6.3b shows the facility configured for football
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Figure 6.3A
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Figure 6.3B
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Size And Shape of Basketball and
Hockey Arenas
• In the early years of professional basketball, hockey team
owners frequently rented out their buildings to basketball
teams when their teams were on the road
• Table 6.3a shows that, as of the 2011–2012 season, 11
basketball teams still shared arenas with 10 hockey teams
• As seen in Table 6.3b, only four teams shared a city or
location and did not share a facility
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Table 6.3A
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Table 6.3B
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Shape of the Game
• Hockey and basketball arenas have similar sizes and
shapes
• Basketball and hockey teams move up and down
rectangular surfaces, and scoring occurs at opposite
ends of the rectangle
• Conflict between basketball and hockey teams has
been financial, not aesthetic
– NBA teams tend to be primary tenants in their facilities
– The most profitable hockey teams are all primary tenants in
their facilities
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Do New Facilities Create Better Teams?
• Profit = R(w, A) - C0 - C(w)
– Revenue (R) increases with wins, w, and decreases with the
age of the team’s facility, A, as fans prefer to watch games in
new facilities.
– Cost has two components,
• C0 is independent of wins
• C(w) increases with additional wins
• C0 rises with the new stadium, but C(w) does not
• A new stadium increases profit if the added revenue
exceeds the fixed cost C0
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A New Facility And Wins
• When does a new facility increase wins?
– When it increases the impact of an added win on revenue
– That is, if fans are more attracted to a winning team when it
plays in a nice new facility
• Figure 6.4 shows that if marginal revenue of a win is higher
in a new facility
– Teams with new facilities have a greater incentive to win
• This is not observed in reality (Hakes & Clapp)
• New facilities do not lead to more wins (Quinn et al.)
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FIGURE 6.4
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Teams as Public Goods
• Recall from Chapter 3 that a public good is nonexcludable and
nonrival in consumption
• Game attendance is not a public good
• Being a fan of the team and feeling pride in it is
– Teams are local public goods in the sense that the feelings they
generate apply to a particular geographic area
– “Red Sox Nation”
• Local sports teams sometimes reflect the aspirations of rival
ethnic groups
– French Canada has long identified with the Canadiens
– FC Barcelona fans fought for it during the Spanish Civil War
• Providing public goods is one role of government
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6.3 How Cities Benefit from Teams,
Facilities, and Events
• One function of government is to mitigate market failure
that occur when
– Markets fail to provide the right amount of public goods,
– Markets overstimulate consumption of common resources
– Markets become monopolized
• In this section we focus on externalities
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Externalities and Sports Facilities
• Externalities are the uncompensated impacts of an action
on a third party
– The firm does not take the third party into account
– It might not even know there was an impact
• Externalities can be positive and negative
• The rationale for public funding of a stadium or arena rests
largely on the belief that the positive externalities of sports
franchises outweigh the negative externalities for their
communities
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Figure 6.5
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Negative Externalities
• When a team plays a game, the spectators generate
noise, overcrowding, pollution, and traffic congestion
– This has a negative impact on innocent bystanders
– For example, nearby residents
• The external costs are the health problems and
inconvenience of those people who are affected by the
noise, overcrowding, pollution, and traffic
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The Impact of a Negative Externality
• Firms’ have a private supply
curve Sp
P
– Based on the cost of inputs
• Intersection with D yields
market outcome: Pp and Qp
• Sp understates costs
Sp
– Some costs are borne by 3rd Pp
parties
– Firm does not compensate
them
D
QP
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Q
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The Impact of a Negative Externality
• Pollution is a social cost
P
– Imposed on third party
– Not part of supply decision
Ss
• Social supply curve: Ss
– Includes private & social
costs
• Socially optimal outcome is
(Ps,Qs)
Sp
Ps
Pp
D
Qs
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QP
Q
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The Market Fails
• Quantity is too high (QP>QS)
• Price is too low (PP<PS)
• Producers and consumers
benefit at the expense of
others
• Government can impose a
tax to reduce quantity to Qs
P
Ss
Sp
Ps
tax
Pp
D
Qs
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QP
Q
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Positive Externality
• Facilities can become landmarks over time and generate
pride of the residents
• Sports facilities also bring benefits to the neighborhoods,
cities, and metropolitan areas in which they are located
• Many firms and households that have no direct connection
to the facility see their incomes rise as a result of its
construction
• Because they do not compensate the team for locating in
the city, local firms and households benefit from a positive
externality
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Figure 6.6
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The Impact of a Positive Externality
P
• Again, producers weigh
private costs and benefits
S
– Private benefits accrue to
the firm’s customers
– Set demand at Dp
• Market outcome is PP,QP
Pp
Dp
QP
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Q
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The Impact of a Positive Externality
• Social benefits might
exceed private benefits
• Demand curve is
actually DS
– Quantity is too low
(QP<QS)
– Price is too low (PP<PS)
P
S
PS
PP
Ds
Dp
QP
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QS
Q
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The Market Fails Again
• Too little is produced
• The government can
– Provide tax breaks
– Subsidize production
• This is the justification for
stadium subsidies
P
S
PS
PP
Ds
Dp
QP
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QS
Q
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Facilities, Spending, and Tax Revenue
• New facilities generate many different forms of
spending
– Constructing even the simplest of major league facilities
produces hundreds of millions of dollars in spending and
income
– Once the facility opens, fans spend tens of millions of dollars
to attend and enjoy a game
– The spending by fans has a broad impact throughout the city
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Table 6.4
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Direct Benefits
• The direct benefit of the Cubs to Chicago is the
new spending the team generates
• New spending takes one of two forms
– The Cubs might cause Chicagoans to spend more—and
save less—than they otherwise would
– More importantly, the Cubs stimulate net exports by
Chicago
• The Cubs sell their games to “foreigners”—residents from
outside of Chicago
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Estimating the Size of Benefits
• According to the Fan Cost Index, a family of four would
spend ~$300 on a trip to Wrigley Field in 2012
• If the renovations to Wrigley Field attract 250,000 additional
fans and the index remains unchanged
– They will generate over $18 million in additional spending per
year
• This overstates the impact on Chicago
– Cubs fans would have spent much of that money elsewhere
in Chicago if there had been no renovation to Wrigley Field or
even if Wrigley Field did not exist
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Direct Impacts are Often Overstated
• Proper evaluation must count only new spending
– Much spending on teams is just reallocated
– It would have been spent on another local activity
• Teams are often conduits – not magnets
– Revenue comes in – but it also goes out
– Team pays salaries to players who live elsewhere
– Items sold at concessions are typically made elsewhere
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The Direct Benefits are Small
• MLB generates less revenue than Fruit of the
Loom
• Three cities have all 4 major sports within city
limits
– Chicago, Denver, and Philadelphia
– Chicago has 5 teams inside the city
– The 4 sports combined account for less than ½ of 1% of total
personal income in each city
• The immediate effect of a new stadium on a city is
thus small
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Multiplier Effects
• The direct effect is amplified by indirect effects
– More spending generates additional income
– Higher incomes increase spending
• It is like throwing a pebble in a lake
– The pebble generates ripples across the lake
– The impact of a team spreads through the economy
• Ripples in a lake slowly fade away
– The impact on the economy also fades to zero
– What determines the size of the ripples?
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The Marginal Propensity to Consume
(Mpc)
• The MPC shows how much of the added income a
consumer spends (DC/DY)
– MPS = marginal propensity to save
– MPC +MPS = 1
• A bigger MPC means bigger ripples
– Added income generates more spending
• Bigger ripples mean a bigger multiplier
• The multiplier adds the ripple effects
– It includes direct and indirect effects
– The total effect is a multiple of the direct effect
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The Arithmetic of the Multiplier
• Let X = initial expenditure
Y = total change in income
Then
DY=$X+$MPC*X+MPC*MPC*X+…
DY=$X*(1+MPC+MPC2+MPC3+MPC4+…)
– We know that MPC<1
– Therefore MPC > MPC2 > MPC3 etc.
• The sum (1+MPC+MPC2+MPC3+MPC4+…) is the multiplier
– The sum equals 1/(1-MPC)
– If the MPC=0.9 then the multiplier=10
• A $43M direct impact has a total impact of $430M
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The Open Economy Multiplier
• In a closed economy, a person either consumes
domestically or saves
• In an open economy, a person can purchase goods from
abroad
• Purchases of imports do not have a domestic ripple effect
• MPI = marginal propensity to import
• In a city, imports come from outside the city
– The multiplier becomes 1/(1-MPC+MPI)
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The Multiplier for a Sports Franchise
• Players get much of a franchise’s income
– Players have more reason to save than others
• Their high incomes last only a few years
• The wealthy have lower MPCs
– Athletes’ low MPC reduces ripples & multiplier
• Much income leaks out of the local area
– Few players & executives live in town
– Leakages are especially severe in smaller cities
• People spend their added income elsewhere
• Local multipliers are closer to 1 than to 10
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Studies of Economic Impact
• Most studies examine how stadiums or teams affect
economic variables
– Median income, employment, or wages
– They find little or no impact
• Recent studies have looked at property values
– Property values reflect the desirability of a city to residents
– Some studies find a positive impact
• These findings now seem to stem from unique features of the
data they used
– Recent studies find a small impact that drops off rapidly as
one moves away from the facility
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Interest Groups & Public Choice
• Public choice (PC) was developed by James Buchanan
– It won him a Nobel Prize
• The central assumption of public choice is that politicians
“economically”
– They pursue their own self-interest
– They act to maximize their political fortunes
• PC helps to explain public funding of stadiums
– Why funding happens even if it is economically
inefficient
– Why funding might be economically efficient
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The Power of Interest Groups
• Interest groups have:
– Well-defined goals
– Access to political power
– The advantages of interest groups
• They can identify beneficial policies
– They can organize to lobby for those policies
– Individuals do not have the same incentives
• They find it harder to identify the impact of a policy
– The cost of individual action exceeds the benefit
– Example: construction unions and stadiums
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Majority Rule is not Always Efficient
• Consider Pennsylvania’s dilemma in 2000
– Philadelphia and Pittsburgh wanted stadiums
– Assume a stadium brings large local benefits
– It brings slightly higher taxes throughout the state
• For simplicity – assume 3 sets of legislators
– East, Central, and West
– Eastern legislators want a facility in Philadelphia
– Western legislators want a facility in Pittsburgh
– Central legislators oppose any facility
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The Bill Fails with Majority Rule
• Western & Central legislators oppose a stadium in
Philadelphia
• Eastern & Central legislators oppose a stadium in
Pittsburgh
• 2/3 of legislators vote against each stadium
• Even if the overall benefits outweigh the overall costs, the
bill fails
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The Benefits of Logrolling
• By trading votes – logrolling – voters can express how
strongly they feel
• Legislators from East and West agree to vote for the
other’s stadium
• Both stadiums are built even though 2/3 actually oppose
each project
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Location, Location, Location
• A city maximizes the positive externalities associated with a
sports franchise if it integrates the facilities into the urban
fabric
– Baltimore tried it with Camden Yards
– Cleveland tried it with Jacobs (Progressive) Field as well as
with Gund (Quicken Loans) Arena
• These attempts were not resounding successes
– The best is not very good
• The construction of these new stadia started a “retro” craze
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The Urban Ballpark
• Nostalgic fans today want downtown facilities
–
–
–
–
They complain about facilities on the outskirts
Or even outside the “home” city
Sometimes they were not even in the “home” city
The Arlington Cowboys play the East Rutherford Giants
• Nostalgia is not what it used to be
– The old ballparks were not built downtown
– Yankee Stadium was built in “Goatville”
– Philadelphians felt that Shibe Park was too far away
• It was on the site of a hospital for communicable diseases
– Cities grew up around the old ballparks
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Cars and Costs
• Suburbanization created a new need
– Where to park the cars?
– Connie Mack Stadium had only 200 spots
• The result in later eras: “a sea of asphalt”
• Stadiums are “space intensive”
– Create problems for a downtown location
– Space costs money we will see why in Chapter 7
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The Impact of Special Events
• Special events are large, one-time events
– They are also called mega-events because they tend to be
larger than regular season games
– Examples include the Super Bowl, World Cup, or the
Olympics
– There are not ongoing events, like a franchise
• A special event is more likely to draw tourists from outside
the region and thus have a greater impact on the local
economy
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Retrospective Studies of
Mega-events
• Does the Super Bowl bring in new money?
– It is often held in tourist areas (e.g., Miami )
– Does it just displace other tourists?
• Porter’s study of the Super Bowl
– Compares spending in counties with Super Bowls to
those in counties that did not host one
– Finds little or no impact
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Retrospective Studies of the Olympics
• Baade and Matheson studied the 1984 Olympics
– They found little effect on the Los Angeles economy
– The Games brought some tourists in but kept others away
• Conflicting findings for the 1996 Atlanta Games
– Hotchkiss et al. find they increased employment and pay
– Baade and Matheson claim the impact was transitory
– Fedderson and Maenning confirm Baade and Matheson’s
results
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Prospective Studies of
Mega-events
• Event studies look at investors’ expectations
– How does an event affect expected profits?
– Can measure using stock market data
– Can apply to specific firms or to entire economies
• Several studies ask how the announcement that a country
will host the Olympics affects stock markets
• The findings are mixed
– No impact found for Sydney Games in 2000
– Positive effect found for Athens Games in 2004
– Small, temporary effect found for Beijing Games in 2008
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