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Measuring the Contribution of Sport to the Economy

Article in Australian Economic Review · February 2006

DOI: 10.1111/j.1467-8462.2006.00430.x · Source: RePEc

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The Australian Economic Review, vol. 39, no. 4, pp. 412–19

Policy Forum: Economics of Sport

Measuring the Contribution of Sport to the Economy

Phillip Hone and Randy Silvers

School of Accounting, Economics and Finance
Deakin University

1. Introduction public subsidies for some sporting events and

competitions is not always readily available
Professional and amateur sports continue to (Banks 2002). However, for the largest sport-
grow as a leisure-time activity in Australia. Not ing event held in Australia, the Sydney Olym-
only does sport generate interest from fans who pics in 2000, the Commonwealth Government
attend matches, but it also generates interest outlaid around $72 million and the New South
from fans who watch games on television or Wales Government expended just over $380
listen to games on the radio, who read the million (Australian Bureau of Statistics 2006).
sports page of the newspaper and discuss po- The Melbourne Grand Prix motor race is re-
tential player moves with their colleagues, lis- ported to have been subsidised to the extent of
ten to sports talk radio, participate in fantasy $19 million in 2003 by the Victorian Govern-
and tipping leagues, and the like. Moreover, ment (Dabkowski 2003) while the much
professional leagues expand, teams move, and smaller V8 Super car event staged in Canberra
broadcasting possibilities burgeon. Cities and received an ACT Government subsidy of
countries expend considerable resources to at- around $5 million in 2001 (Banks 2002). In a
tract one-time events, such as the World Cup more general sense, total outlays by all levels
and Olympic Games. Sometimes, winning of government in Australia on sport and recre-
these bidding wars entails construction of in- ation in the 2000–01 financial year were
frastructure. around $2.1 billion (Australian Bureau of Sta-
As a result of these trends there has been a tistics 2006).
marked increase in the commitment of finan- With this public sector involvement has
cial resources to sporting activities by both the come an increased concern with monitoring the
public and private sectors. The major sporting uses to which the funds are put. Not surpris-
organisations in Australia undertake signifi- ingly, evaluations of the economic return from
cant economic activity in their own right. For public expenditures have become an important
example, Cricket Australia (2005) reported part of this monitoring process and have re-
total revenue of $72 million in 2004–05; the sulted in a growing body of literature. This lit-
Australian Rugby Union (2003) reported net erature covers the reporting of evaluations of
revenues of more than $60 million for the 14 particular competitions or events (for example,
months ending December 2003; and the Aus- Burns, Hatch and Mules 1986) as well as the
tralian Football League (2005) reported a net analysis of how evaluations should be under-
operating surplus of around $130 million for taken. Notable amongst this latter group is
the year ended October 2005. Hefner (1990), Burgan and Mules (1992),
The financial involvement of the public sec- Crompton (1995), Noll and Zimbalist (1997)
tor has taken various forms, including the sub- and Dwyer, Forsyth and Spurr (2006). The
sidisation or underwriting of events and conclusion of most of these studies is that the
competitions. Information about the extent of evaluation should assess the net economic
©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
Published by Blackwell Publishing Asia Pty Ltd
 Hone and Silvers: Measuring the Contribution of Sport to the Economy 413

impact that the event has on the target econ- nomic impact studies. Crompton (1995), for
omy—usually taken to mean the expansion in example, argues that they often fail to include
the total level of goods and services produced opportunity costs, and fail to correctly derive
in the target economy or changes in Gross Do- multiplier coefficients. Noll and Zimbalist
mestic Product (GDP). (1997, p. 496) note that these studies are
We argue that this national income approach ‘fraught with methodological difficulties’,
based on changes in GDP is generally inappro- such as confusion between new spending and
priate and often provides potentially mislead- spending diverted from other local activities,
ing information to decision makers. We and overstating the multiplier. Others comment
provide a taxonomy of situations and present on the failure of these studies to take sufficient
alternative methods of evaluating the contribu- account of ‘intangible’ effects (Dwyer et al.
tion of sport—to the economy, to the firm and 2000; Swindell and Rosentraub 1998). In any
to the local community. By focusing on the in- event, as Siegfried and Zimbalist (2000, p. 103)
formation requirements of public policy in the note, ‘independent’ economic impact studies
sports domain, a more meaningful set of mea- (in contrast to ‘promotional’ studies) suggest
sures is derived. It is suggested that producer that expenditure on sports facilities has little
surplus and consumer surplus provide the basis positive impact on regional economic develop-
for a better measure of social welfare than does ment.
the change in GDP. A logical starting point for assessing how the
economic impact of sport should be measured
2. A Taxonomy of Economic Measures is to consider who wants this information and
why this information is required. This will
The common practice in evaluating the eco- guide what information should be collected
nomics of sporting events is to assess the im- and how it should be analysed. This perspective
pact that the event has on the GDP of the region on the issue is portrayed in Figure 1.
hosting the event. In assessing the economic
impact of an event in this way, only expendi- 2.1 Government Intervention
ture that would not have existed in the absence
of the event should be included. For a conven- 2.1.1 Efficiency Objectives
tional economic impact study this means that
the study focuses exclusively on ‘new money The role of government in sporting events and
injected into an economy by visitors, media, organisations is a controversial issue. Unfortu-
external government entities, or banks and in- nately, economic impact studies typically pro-
vestors from outside the community’ (Cromp- vide little or nothing of relevance to this issue
ton 1995, p. 26). (Seaman 1987). The case for government sup-
There has been considerable discussion re- port of sporting events depends on the objec-
garding the most appropriate techniques and tive of the intervention. If the intervention is
analytical framework for undertaking eco- planned to improve the efficiency with which

Figure 1 A Measurement Matrix

Who Why What How

1. Government Intervention to enhance Social CBA Market failure
social welfare function Distribution
Risk and time
Compare size of the sector GDP
2. Private sector Profit from investment Private CBA Risk and time
3. Not-for-profit sector Community investment Private CBA Defining objectives
Risk and time

©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
414 The Australian Economic Review December 2006

resources are used in the economy, the case for mental value of an additional club in the
government assistance should rest on a social league, and other such issues.
cost–benefit analysis (CBA) and on the pres- Potential impediments to the socially effi-
ence of market failures. In other words, a nec- cient operation of a sporting market, or market
essary condition for government intervention failures, include (i) the public good character-
on efficiency grounds is that there are factors istics of sport; (ii) externalities or spillovers of
impeding the efficient operation of the market. costs and benefits to other parties; (iii) diver-
A CBA will reveal if government intervention gences between private and social discount
in sport to correct any market failure results in rates; and (iv) information problems. The liter-
a net gain to the community. ature on sports focuses on the first two poten-
The answering of this question involves re- tial market failures.
course to the notions of social surplus from One characteristic of a public good is that it
welfare economics. In a strictly utilitarian can exhibit ‘free rider characteristics’. Burgan
world the value of sport is the sum of the gain and Mules (2000) note that firms may be reluc-
in surplus to domestic consumers plus the gain tant to finance special events because they are
in surplus to domestic owners of resources re- unable to capture all of the benefits of funding
warded from the sporting event. the event—individual firms can ‘opt out’ of the
In practical terms, producer surplus is the funding and still capture the benefits of busi-
difference between the social value of the re- ness that the event generates. Other examples
sources used and the returns provided in the of public goods and/or positive externalities in-
market place. Each resource should be valued clude local unity, fan loyalty and civic pride
at a price equal to the return it would yield in its (Johnson, Groothuis and Whitehead 2001;
next best occupation. For most resources this Swindell and Rosentraub 1998; Fort 2003), sat-
will be its market price; however, market prices isfaction from living in a ‘big league town’ and
need not always reflect true social opportunity being able to view coverage of the events in the
costs (Boardman et al. 2006). Wherever there media (Zimmerman 1997).
are externalities involved in production or the The implications of a possible external bene-
suppliers of inputs are able to exert market fit from sport through the impact that govern-
power in setting prices, market prices likely ment support of sport might have on obesity-
overstate social opportunity costs. Similarly, related health costs are highly likely to be
where unemployed labour is taken up by a raised in the near future if they have not already
project, the project outlay and the social oppor- been considered in policy circles. However,
tunity cost could differ. justifying the subsidisation of professional
Consumer surplus is more difficult to esti- sport and major sporting events on the basis of
mate as it relies on understanding the maxi- reductions in health care costs seems to us, at
mum willingness and ability to pay of least at a prima facie level, dubious.
consumers. One approach that can be used to Obesity is, for most individuals, a conse-
elicit consumers’ willingness to pay is the con- quence of too much food consumption and not
tingent valuation method (CVM).1 However, enough exercise. In Australia and many devel-
there are few examples of the application of oped economies, nationalised health care im-
CVM specifically to team sports. While there plies that individuals who are healthy will
are no published estimates of domestic con- subsidise those who are sick. Because individ-
sumer surplus from major sporting events in uals can affect both the likelihood of requiring
Australia there are some estimates for other health care and the amount of health care they
countries.2 receive, and because they do not bear the full
Measurement of elasticities can be useful to cost (or pay their expected costs), their over-
compute consumer surplus. These measure- consumption of the deleterious good, or under-
ments could also be helpful in determining the consumption of exercise, implies a divergence
optimal stadium size, the optimal stadium loca- between ex ante private and social health costs.
tion, where to host a sporting event, the incre- This divergence then raises the question for the
©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
 Hone and Silvers: Measuring the Contribution of Sport to the Economy 415

policy maker as to what is the best method to be the basis for any strong case for government
correct it and, then, whether the benefits of cor- support of sport.
recting it will actually outweigh the costs of While there are strong grounds for favouring
implementing the correction. the assessment of the welfare implications of
The benefits from encouraging a healthier sporting events through changes in consumer
lifestyle depend upon the malleability of indi- and producer surplus values, the valuation of
viduals’ preferences, the effectiveness of that these changes in a social welfare sense is po-
particular event altering preferences, the rela- tentially problematic from a conceptual per-
tive size of the marginal population, the health spective where uncertainty is substantial.
status of that population, and the time prefer- Marked uncertainty in total project costs can
ences of society. With ample media coverage result in uncertainty in ticket prices for con-
and access, the inducement to exercise could be sumers. If the price is random, then firms or
expected to come predominantly from the ex- governments cannot change the price, but
istence of the sporting event rather than the lo- rather the distribution of price. Schlee (2003)
cation of the event. Even if more people showed that expected change in consumer sur-
exercise more often, the benefits in improved plus need not be a reliable measure of social
health care are uncertain and, in the case of welfare when there is risk in the price. The
obesity and the consequent reductions in car- change in expected consumer surplus is only a
diopulmonary events, many years if not de- good measure of the consumer’s willingness to
cades into the future. pay for a price change if the income elasticity
In other words, reducing the health care ex- of demand is small and consumers are risk neu-
penditures and improving general health is a tral—two conditions about which we have lim-
worthy goal, but given the alternative ways of ited information in the case of sport.
encouraging exercise, this is unlikely to be a
determining factor in the case for subsidising 2.1.2 Non-Efficiency Considerations
sport since the impact could well be small, in-
direct and highly uncertain. If the intervention is aimed at achieving some
The sports literature does not discuss two non-efficiency objective, then the argument is
other potential sources of market failure: diver- different. Although it is difficult to see what
gences in discount rates and information fail- equity notions could justify government sub-
ure. The construction of sporting facilities and sidisation of sport, political considerations
programs can involve large sums of money could, and probably do, prompt such action.
outlaid over an extensive period of time with However, the extent of the impact of sport on
benefits accruing far into the future. The plan- GDP in no way adds weight to the case for
ning horizon that is implicit in the evaluation of government subsidies on equity grounds ei-
these proposals can have a big impact on the ther.
perceived attractiveness of these projects. Pri- Nevertheless, most government projects
vate investors may well have a shorter planning generate distributional consequences about
horizon (or higher discount rate) than society which the policy maker cares. If an inefficiency
as a whole. This may mean that sporting pro- exists, and government intervention in sport is
grams that can make a potentially positive con- preferable to investment directly in infrastruc-
tribution to society will not be undertaken ture, then the policy maker must examine the
without some form of government interven- distributional consequences. The weights in
tion. These investments are also characterised the social welfare function on different individ-
by less than perfect information on both the uals determine whether or not the government
costs and benefits involved. This imperfect in- intervention improves social welfare on equity
formation could lead to a socially inefficient grounds. If it lowers social welfare on equity
level of private investment, either too high or grounds, then the policy maker could correct
too low. Both these forms of market failure are this reduction in social welfare through other
ever present and it is not clear that they could projects or a separate transfer.
©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
416 The Australian Economic Review December 2006

2.2 The Relative Size of the Sports Industry in sporting field. For example, in the early 2000s,
the Economy Phoenix, Arizona had two ongoing internal
battles. Communities within the metropolis of
If the objective is to compare the size of the 4 million vied to win the site of the professional
sports industry with the overall economy the hockey team and the site of the professional
situation is a little different. In this context, American football team by offering subsidies
governments and the wider community may be and inducements to the teams (International
interested in the comparison of the GDP from Facilities Group 2006). These teams already
sport with national GDP. However, the GDP played in metropolitan Phoenix. The lobbying
measure that would be most appropriate would efforts would eventually create winners and
be total expenditure on sports, not expenditure losers by transferring rents in the form of com-
by non-residents. Additionally, it may be diffi- munity funds to professional sports providers.
cult to classify some expenditures; for exam- Moreover, such competition between bid-
ple, should the entire purchase of a jumper with ders has elements of an arms race; as with most
the team logo be counted as expenditure on arms races, both bidding parties could be better
sport or expenditure on clothing, or should it be off if a neutral third party had intervened to
divided as the cost of a comparable quality stop the race initially. From the perspective of
jacket on clothing and the remainder on sport? the Phoenix community, it may have been bet-
ter for all residents of the Phoenix metropolitan
2.3 Private Profits area to agree to determine the new stadia’s lo-
cations by lottery and have the winning sub-
From a private firm’s perspective the appropri- urbs compensate the losing suburbs.
ate measure is the extent to which an invest-
ment adds to the firm’s profit stream. For many 2.5 One Last Salvation for GDP
investments, this involves a CBA with risky re-
turns and costs over a number of years. The We have argued that GDP or induced GDP
dearth of information on sporting markets adds growth is a poor objective for a policy maker.
to the difficulty in carrying out these analyses. GDP could still be a useful measure despite
For example, there is little information on the this, provided the ranking of projects by in-
elasticity of demand for sporting tickets; media duced GDP growth is perfectly correlated with
rights generate funds from individual negotia- the preference rankings of the policy makers.
tions that are sometimes long drawn and often However, since GDP does not take into ac-
characterised by considerable scope for bar- count the degree of risk in a project, time-
gaining. frame, and other characteristics, it is very un-
likely that induced GDP growth would be a re-
2.4 Not-for-Profit Objectives liable metric.

Community organisations and not-for-profit 3. Summary and Concluding Comments

sporting organisations are a common form of
organisation in sporting markets. These organ- There is increasing interest in evaluating the
isations can have wide and complex objective economics of sporting events in Australia. This
functions. In undertaking a CBA on the returns interest has been spurred on by rising incomes
from an investment for these organisations the and increasing expenditure of both money and
specification of the objective function is criti- time on sports and leisure activities. Although
cal. It may well involve a narrower sense of economic impact measures based on changes
community than would be the case for federal in GDP may be relatively easy to estimate and
or state governments. apparently straightforward to interpret, these
In the case of local or regional government analyses should not be used to justify govern-
involvement in financing sporting infrastruc- ment subsidies of sport, and it is questionable
ture, there are often winners and losers off the as to what useful role they really perform. They
©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
 Hone and Silvers: Measuring the Contribution of Sport to the Economy 417

are founded on the notions of national income Compared with many other markets we
accounting and have little relevance to the es- know relatively little about the elasticities of
sentially microeconomic questions that face supply and demand in sporting markets. There
the sports policy community. is an obvious need for further work in this area
Importantly, even if induced GDP growth is as information on these basic parameters is cru-
the policy objective, and subsidising sport is cial in determining the optimal level of private
one means of achieving that objective, policy and public investments in sport.
makers must justify an essentially indirect ex- Obesity is a major and growing health prob-
penditure on sporting events rather than spend- lem in Australia and many developed econo-
ing on more targeted programs that are more mies. Because it causes premature death,
directly related to economic growth. Similarly, increases absenteeism, and involves expensive
if a market failure relates directly to infrastruc- medical care, reducing obesity is a worthy pub-
ture investment (that is used in part by sport), lic policy goal. However, the link between the
then the decision should be based on the partic- financial support of sporting events and indi-
ular infrastructure issue involved. vidual health and health care expenditures is at
Ultimately, one would hope that a policy best very indirect. Policy approaches that deal
maker has an objective function that depends more directly with the obesity issue, such as
on the welfare of the community he or she rep- physical education in schools, would appear to
resents. GDP clearly measures only one aspect be more appealing from a public policy per-
of this welfare and does so in an unreliable spective.
manner. In evaluating whether or not to invest Finally, the nature of both the political pro-
in or subsidise sport, the policy maker must cess and the market for sport means that bid-
first identify the individuals that make up the ding wars are likely to remain a defining
community. Then, the policy maker needs to characteristic of the sports market. These wars
determine how any changes will impact on that have the potential to waste resources. Addi-
target community. This impact will depend on tionally, the public goods nature of many
factors such as risk preferences, time horizon events means that the government has a role in
and rate of time preference of the community, coordinating firms and soliciting their prefer-
and the presence of incomplete information ences. Because the various firms have private
and information asymmetries. Measures of information about their valuations, the problem
changes in GDP, regardless of how accurate is an application of mechanism design. Further
they are, offer little in clarifying these complex research in this area applying game theory has
decisions. the potential to find methods to reduce the inef-
A set of alternative measures of the eco- ficiencies resulting from the Pareto inefficient
nomic contribution of sport to the economy has outcome of bidding wars and information
been suggested based on possible policy ques- asymmetries.
tions. The welfare measures involve the mea-
surement of producer surplus and consumer September 2006
surplus flowing from a sporting activity.
Sporting events and clubs are often not scal- Endnotes
able and are infrequently traded; therefore, it is
more difficult to estimate demand for these 1. See Hanley and Spash (1994) for a discus-
than for other goods. Where the cost of estima- sion of CVM and related techniques.
tion is a constraining factor, recourse can be
sought to techniques such as benefit transfer 2. See Johnson and Whitehead (2000),
and meta-analysis for estimating surplus values Johnson, Groothuis and Whitehead (2001),
(Brouwer 2000). Nevertheless, the fact that Gouguet (2002), Irani (1997) and Alexander,
consumer surplus may be difficult to measure Kern and Neill (2000) for estimates of con-
does not mean that it is not both significant and sumer surplus for European or US sporting
substantial. events.
©
2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
418 The Australian Economic Review December 2006

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