Theme 2 171111

Theme 2, Week 8 The economic impact of major sporting events: 

EC340 Topics in Applied Economics (a) Department of Economics University of Warwick Dr. Chris Doyle 23 November 2011 Theme 2, Week 8 The economic impact of major sporting events

Structure of lecture: 

Structure of lecture Major sporting events Issues Bidding for events London 2012 Olympics Bid Modelling Lobbying and Bidding

Major Sporting Events: 

Major Sporting Events

Some Issues: 

Some Issues South Africa has expressed an interest in hosting a Formula One Grand Prix. The country is aiming to host a street race through Cape Town from 2013. Despite initial enthusiasm for the plan, the final decision has yet to be made and the financials for the F1 project will be one of the key considerations: “ The benefits of F1 look very compelling however we need to look at the cost of hosting another big sports event and if it is in the developmental interests of the city,” Mansoor Mohamed, executive director of economic social development and tourism for the City of Cape Town Reported January 2011 Do hosts tend to view events favourably (with a bias)? Is there a winner’s curse to the bidding processes? (Assuming a large common value component) Do major sporting events on average generate net benefits? Reports on the impact of major sporting events vary from the favourable to the critical In this theme we shall address two main issues: Bidding for major events The impact of major sporting events

The favourable view: 

The favourable view The right to host an international event is now one of the most valuable prizes in sport with the market valued US$50 billion worldwide. Hosting events is no longer purely about prestige either. The power of sport to deliver lasting economic, social and health benefits to host communities is also being recognised as never before, prompting government support for bidding to grow at a staggering rate. Source Sport Business website

The critical view: 

Source: Coates (2010) “ World Cup Economics: What Americans Need to Know about a US World Cup Bid ” The critical view

Economic Impact of Olympics: 

Economic Impact of Olympics While the financial outcome from hosting the Olympic Games can be identified reasonably clearly after the event, the analysis in this article shows that it is much more difficult to generalise about the overall economic impact of the Olympic Games. In terms of the financial impact, the contrasting examples of Montreal, where taxpayers are still meeting the financial costs of the Games, and Los Angeles, which ran a large financial surplus , can be quoted here. In terms of the wider economic impact, the legacy of the Barcelona and Sydney Games is generally regarded as positive, but quantifying this effect is difficult. Most ex-ante studies tend to indicate significant net economic benefits, but there are great uncertainties around many of the assumptions underlying such analyses . There is also a lack of rigorous ex post studies that have assessed whether the predicted gains from past Olympics have in fact been achieved. There is some evidence of post-Games economic slowdowns particularly in the most affected sectors such as construction and hotels, but it is difficult to demonstrate a causal link here given that there are so many other factors that influence overall economic performance during such periods. Source: PricewaterhouseCoopers European Economic Outlook June 2004

London 2012 Olympics: 

London 2012 Olympics There will be an economic benefit to be gained from hosting the Games, but it may not be quite as large as people expect. No-one can be sure, at this stage, how much extra income will be generated from tourism, but the Games may well deter as many people as they attract . Any gains will be in the long term but will not be automatic. Whether those gains will depend on better funding or on better strategic management is something which we will address in a future inquiry into tourism. Source: London 2012 Olympic Games and Paralympic Games : funding and legacy House of Commons Culture , Media and Sport Committee, HC 69-I, 24 January 2007

Part 1: Bidding for events: 

Part 1: Bidding for events Assume a major sporting event is seeking a host Example, F1 race, Olympics, FIFA World Cup, etc. Typically the process involves a host bidding to fund infrastructure and local organisational costs The auction is a comparative selection process (beauty contest) With events such as the Olympics bidders emphasise benefits to the sport or sports Decision to host is made by the respective sporting body e.g. IOC, FIFA

Timeline for London 2012: 

Timeline for London 2012 2003 – Bid team formed, led by Barbara Cassani. Put together ‘ Applicants Questionnaire’, outlining details of how London would stage the Games 16 January 2004 – Bid officially launched at Covent Garden. Applicants Questionnaire sent to the IOC Nine other cities send in Questionnaire - Havana, Leipzig, London, Madrid, Istanbul, Moscow, New York, Paris and Rio de Janeiro 18 May 2004 – IOC shortlists five cities: London, Madrid, Moscow, New York and Paris Sebastian Coe becomes Chair of the bid company May-November 2004 – Candidate File put together, spelling out in detail how the London Games will be staged 15 November 2004 – 15-year-old east London schoolgirl Amber Charles hands in Candidate File to IOC headquarters, Lausanne February 2005 – IOC's Evaluation Committee visits London to inspect the plans February – July – London 2012 team works on the final bid presentation 6 July 2005 – London 2012 delegation travels to Singapore to make its final presentation Sebastian Coe presents London 2012’s vision for a Games to inspire the youth of the world Members of the IOC vote in secret electronically, until one city has more than 50% of the total votes. After each round, the country with the lowest number of votes is knocked out. Voting goes down to the final two cities - London and Paris 12.46pm : Jaques Rogge announces London as the 2012 Host City, winning by 54 votes to 50 .

Votes in 2012 Olympic Host City Decision: 

Votes in 2012 Olympic Host City Decision

Bidding and Information: 

Bidding and Information The information held by a Sporting Body (seller) and the bidding cities (buyers) plays a key role in affecting bid processes (auction design (rules )) and bids (strategies) Private Value Model Typically a sporting organisation (seller) will not know the valuations of individual host nation/city bidders (buyers) and each individual bidder (buyer) will not know the valuation of other (bidders) buyers Pure Common Value Model The value of an object should be the same for everyone but bidders often have different information (signals) about the value – possibly drawn from the same distribution In practice bidding for mega sport events involves private and common values In bidding to host a sporting event bidders will have a private value determined by local conditions and a common value determined by the ‘market’ circumstances (e.g. visitors/tourists, merchandising, etc.) The organising committees will typically be the recipients of key common value elements (e.g. broadcasting rights) therefore organising body may be indifferent about location for global events – sporting decision makers likely to be subject to much lobbying predicated on why host adds value to the sport

London 2012 Olympic Games Bid: 

London 2012 Olympic Games Bid The costs of bidding to host the Olympic and Paralympic Games in London in 2012 were met by: Department for Culture, Media and Sport (DCMS ) London Development Agency (LDA), and Financial support or value in kind from commercial and other organisations The bid budget was £ 29.1m of which £ 20m was a grant from the DCMS and LDA - £10m from each organisation The remainder was provided through commercial sponsorship and support raised by the Bid team On 18 October 2005 London 2012 announced that the bid had come in under budget and confirmed that a sum of £1.4m was going to be returned to its major stakeholders, DCMS and the LDA The total budget is £9.3 billion – which may be regarded as an indicator of the true bid value Source: Financing the London 2012 Olympic Games , Standard Note: SN/SG/3790 Last updated: 27 July 2010 House of Commons Library

Modelling Lobbying and Bidding: 

Modelling Lobbying and Bidding We observe that bidding is paid for by the public (£20m), but a contribution is made by private individuals (about £9m), though actual bids comprise commitments on a much larger scale The private individuals likely include groups lobbying for the games as they derive a benefit from the bidding process and an expected benefit should the bid succeed A paper by Pomfret, Wilson and Lobmayr (2009) ( PWL ) seeks to model this type of situation in the spirit of Gene Grossman and Elhanan Helpman (1994) “ Protection for Sale ” AER , Vol. 84, No. 4 . pp. 833-850, which looks at lobbying for trade protectionist policies using a common agency approach pioneered by Bernheim and Whinston ( 1986, Econometrica ) A common agency is a situation where several principals have a stake in the actions of one agent and where there is some conflict of interest between the principals Below I draw on the PWL model to develop some results suggesting why governments tend to ‘over-bid’ for mega sporting events – which may amplify any winner’s curse type effect

PWL Model: 

PWL Model Government makes a decision to bid for a sporting event on behalf of two principals The general public and vested interests (the latter represented by a ‘lobbyist’). Government has a utility function dependent on incomes from lobbyists and aggregate welfare This behaviour makes government seeking an objective deviating from that aimed at maximizing social welfare: represented by aggregate welfare Assumption is made to see whether lobbyists are able to influence policy (amount bid for a sporting event) In Grossman and Helpman the focus is on industries that may pay government to erect protectionist policies Two principals have separately delegated to government the choice of bid value B – given the choice made by government, l obbyists choose the optimal amount to contribute Government faces a trade-off, as the cost of the bid is borne entirely by the public: a larger B increases the chances of winning a contest and hence raises political contributions (lobbying funds) but also reduces the welfare of the public who pay for the bid

PWL Model: 

PWL Model Suppose government set B=0 In this case the country would not win the contest, lobbyists would not make a contribution The general public would avoid paying B but on the other hand would miss out on any expected benefit associated with the contest If the contest is very valuable and a small bid value enhances the probability of winning favourably, then government would set B>0 and this would benefit both principals and government Suppose government welfare was not dependent on incomes from lobbyists and simply was aggregate welfare In this case government would choose a bid value B such that at the margin the extra welfare generated equals the amount of the marginal bid, call this amount B* If government does care about lobbyist income, investing more in a bid (which is paid for by tax payers) enables it to receive income it values and so it will over-invest relative to the case where it does not value lobbying income (alternatively where lobbying, political contributions, is outlawed) Another way to interpret this is if politicians perceive prestige value from winning, then over-investing may arise because it leads to offsetting contributions

PWL Model: 

PWL Model Government ( G ) in country 1 makes a bid B 1 to win a sports event having an expected benefit R>0 (which may be assumed to have a large common value) The choice made by G affects the Public (P) and vested interest lobbyist (L) Lobbyist are assumed to make a contribution S contingent on B 1 : S( B 1 ), S´( B 1 )>0, S´´( B 1 )<0 I do not like this mechanical assumption but it ties variations in B to S, otherwise it would be independent and uninteresting. In modelling terms it implies that lobbyists care about the selection B by the Government as it determines the amount of lobbying income provided. Thus lobbyists would like to choose B – as this determines S. The lobbyist in country 1 derives expected returns: Where Ω (B 1 ) represents the direct benefit associated with the bid, 1- γ denotes the share of expected success R , and ρ is the probability of success The Public ( P ) pay entirely for the bid (which is not an unreasonable assumption), thus payments made by lobbyists are treated as flowing directly to politicians

PWL Model: 

PWL Model In the model the probability of success is assumed to be dependent only on B 1 which is not very realistic. PWL assume: I shall also consider another functional form based on two countries bidding:

Model: 

Model There are three ‘actors’ in the model: The Lobbyist (principal) The Public (principal) The Government (agent) Assume the actors have the following utility functions: Note that the lobbyist cares about net r eturns, the public about their net returns, though B 1 is chosen by their representative Government (agent). Government cares about aggregate welfare as well as lobbying income received. 0< ϴ <1 is the relative weight attached by government to aggregate welfare – where the l obbying income S cancels out as it is a transfer f rom vested interests to government. In Grossman a nd Helpman the parameter ϴ >0 .

Equilibrium requirement: 

Equilibrium requirement The game involves choices made by the agent Government ( B 1 ) and by implication the lobbyist (who wishes to choose a B 1 that results in S in its favour) – alternatively the lobbyist as principal is choosing B 1 to maximize its payoff, given the agent is choosing B 1 to maximize his payoff Consequently the choice of B 1 must maximize the government’s objective function U G ( B 1 ) but it is also the case that this maximization is equivalent to the maximization of U L ( B 1 )+U G ( B 1 ) Maximizing U G ( B 1 ) gives Maximising U L ( B 1 )+ U G ( B 1 ) gives:

Comparative statics: 

Comparative statics The first order conditions imply: The above may be substituted into the first order condition for maximisation of the government’s utility (this implies the choice by government is consistent with the lobbyists S ): Substituting leads to:

Comparative statics: 

Comparative statics Totally differentiating [1] gives: The agent selects a higher bid when R is higher, a s this positively affects the principals’ payoffs. Winner’s curse like effect? The agent selects a lower bid when γ is higher, a s the lobbyist obtains a greater share of the direct b enefits from success. The agent selects a lower bid when B 2 is higher, (there is strategic substitution) when the m arginal effect on the marginal probability of winning decreases in the other country’s bid.

Strategic Complements?: 

Strategic Complements? The agent selects a higher bid when B 2 is higher, (there is strategic complementarity) when the m arginal effect on the marginal probability of winning increases in the other country’s bid.

Conclusion: 

Conclusion B idding between countries is likely exhibit strategic complementarity We have modelled the bidding for mega sports events as a competitive game between cities and/or nations Bidding often takes place against a backdrop where expected returns may give rise to a winner’s curse type effect – a common value element Common value components raise the prospect for the winner’s curse, alternatively for government to overbid relative to the true unobservable common value ex ante Lobbyists may influence governments and emphasize strategic oomplementarity Governments ‘overbid’ relative to the case where they are concerned solely with aggregate welfare – as lobbyists are able to influence the government (the agent) and ‘free ride’ on tax payer support Next tim e we will examine whether bidders do ex post paid too much and what the net benefits of sports events are ex post