The Economics of Sports FIFTH EDITION Chapter 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-2 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-3 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! Copyright ©2014 Pearson Education, Inc All rights reserved 6-4 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-5 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 not typically sell out, so there is more room for growth • Eventually, attendance is a result of wins Copyright ©2014 Pearson Education, Inc All rights reserved 6-6 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-7 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-8 Table 6.1 Copyright ©2014 Pearson Education, Inc All rights reserved 6-9 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-10 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 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) Copyright ©2014 Pearson Education, Inc All rights reserved 6-49 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 than to 10 Copyright ©2014 Pearson Education, Inc All rights reserved 6-50 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-51 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-52 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 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-53 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 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-54 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-55 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-56 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-57 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-58 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-59 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-60 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-61 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-62 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 Copyright ©2014 Pearson Education, Inc All rights reserved 6-63 ... 6-10 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 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. .. Football stadiums have grown • Baseball and football now have separate facilities • Table 6. 2a lists capacities of shared stadiums in 1961-1982 • These large facilities were all similar and round