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July 13, 2014

Does it pay to host mega sporting events?

The football World Cup, organized by the Fédération Internationale de Football Association (FIFA), and the Olympic Games, organized by the International Olympic Committee (IOC), are the largest sporting events in the world, involving billions of dollars in expenditure (over £9 billion, for example, in the case of the 2012 London Olympics).

Usually there is no shortage of bidding nations, but do the expected returns actually materialize? With competitive bidding and a monopoly provider we would expect bidding to continue up to the point that the expected return equalled zero, or even became negative if the winner’s curse applies, whereby the winner tends to overbid to ensure success. The monopoly suppliers would appropriate any economic rent through bribes from the suitors or indirectly by passing on the costs of mounting the event to the host nation. Thus, IOC Rule 4 requires the host city to assume financial liability for the games, as some cities have found to their cost.

The bidding process has been mired in controversy. In the case of the 2014 World Cup in Brazil there have been riots because many felt that resources spent on the construction of lavish stadiums and other infrastructure could have been better used elsewhere (for example, on bettering the lot of the impoverished). No consideration is given to the opportunity costs of such investments.

The award of the 2022 World Cup by FIFA to Qatar, a small nation with no experience of top class football and temperatures of up to 50 degrees in the summer when the competition is normally held, astonished many commentators. There have been allegations of bribery of officials with voting power, mirroring earlier episodes relating to other countries with the IOC.

Economic impact studies generally find that the financial benefits of hosting such events are exaggerated and short-lived when allowance is made for the following: that some consumption would have been diverted to other uses, there will be leakages, and the events normally last for only three weeks (Sandy, Sloane, and Rosentraub, 2004). Any effects on employment are likely to be small and short term and one study of the Los Angeles and Atlanta Olympic Games (Baade and Matheson, 2002) could not find a significant deviation from the long-term growth rate of employment in these two cities.

Sometimes attention is focused on indirect benefits, such as a feel-good factor, that are difficult to quantify. One study (Rose and Spiegel, 2011) has argued that Olympic Games host countries and even unsuccessful bidders experience significant lasting effects on exports because of the signals of openness and competitiveness that they present, but the 20% effect they estimate seems implausible, and Maennig and Richter (2012) find that using an appropriate matching and treatment methodology to control for selection bias causes the significance to disappear.

What, if anything, can be done about the unsatisfactory nature of the bidding process? In this respect the Los Angeles experience is instructive. In this case, following previous financial disasters, including Montreal, Los Angeles was the only bidder, so there was a bilateral monopoly situation. Rule 4 was not accepted, infrastructure expenditure was limited, private sponsorship was relied on to a considerable extent, and the Games were profitable. Perhaps in the future the bidding process could be arranged by an outside body and the preferred candidate left to negotiate with FIFA or the IOC on equal terms, so that the tendency to overspend would be constrained.

References:
Baade, R. A., and V. Matheson. “Bidding for the Olympics; Fool’s gold.” In: Pestana Barros, C., M. Ibrahimo, and S. Szymanski (eds). Transatlantic Sport: The Comparative Economics of North American and European Sports. Cheltenham and Northampton, MA: Edward Elgar, 2002; pp. 127-151.

Maennig, W., and F. Richter. “Exports and Olympic Games: Is there a signal effect?” Journal of Sports Economics 13:6 (2012): 635-641.

Rose, A., and M. Spiegel. “The Olympic effect?” The Economic Journal 121:553 (2011): 652-677.

Sandy, R., P. J. Sloane, and M. S. Rosentraub. The Economics of Sport: An International Perspective. Basingstoke and New York: Macmillan, 2004.

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