9/2/2014: Economics of Olympic Games: Part 4: Income Prices and Corporate Returns

In Part 1 I covered the macroeconomic impact of Olympics (http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part.html) while Part focused on labour market impact and the effect of the games on the host city (http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part_8.html). Part 3 covered the cost overruns (http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part_1467.html).


In this part, summary of some research on the Olympics from the micro-economic perspective of participation determinants and business returns.


So what is the underlying income dynamic linked to participation of athletes in Olympic Games? Johnson, Daniel K. N. and Ali, Ayfer, A Tale of Two Seasons: Participation and Medal Counts at the Summer and Winter Olympic Games (January 2002. Wellesley College Department of Economics Working Paper 2002-02: http://ssrn.com/abstract=297544) "examines the post-War Summer and Winter Olympic Games in order to determine the economic and political determinants of national participation, of female participation in particular, and of success at the Games (i.e., medal counts). Compared to the Summer Games, Winter participation levels are driven more by income and less by population, have less host nation bias and a greater effect of climate."

"Roughly similar factors determine medal count success, although single party and communist regimes win far more medals (and gold medals) in both seasons than can be attributed to other factors."

"We find no large significant differences between types of athletic events (e.g. luge versus nordic skiing). We estimate that major participating nations requires a $260 rise in income per capita to send an extra participant. Similarly the "cost" of an extra medal is $1700 per capita and $4750 per capita for an additional gold medal."

For all these Olympic 'spirits' and 'values', we have an old-fashioned playground for the rich nations when it comes to medals. No, the 'best' don't win, unless they are also backed by the richest...


Of course, the richest require returns on their Olympic investments, if not public, then private, right? So Olympics should be a serious business when it comes to delivering returns on corporate spend. Right?

Frame, W. Scott and Farrell, Kathleen A., The Value of Olympic Sponsorships: Who is Capturing the Gold?. (Journal of Market-Focused Management, Vol. 2, No. 2, November 1997: http://ssrn.com/abstract=282975)

"In recent years, corporate sponsorship has become an increasingly important element of the marketing communications mix. This paper uses data from the 1996 Atlanta Summer Olympic Games to measure the value of Olympic sponsorship."

And they find that: "Using stock return data, …the shareholders of sponsoring firms earn negative average abnormal returns around announcement of Olympic sponsorship agreements. This finding, consistent with an agency cost explanation of corporate investment practices, is robust to variation in a number of firm- and sponsorship-specific variables. In addition, cross-sectional analysis supports the monitoring hypothesis, as significant equity ownership by institutional investors is positively related to abnormal returns around announcement."

All of which means that the study "results suggest that utilizing Olympic sponsorships in the marketing communications mix may not be value-enhancing."


And more on same: Molchanov, Alexander and Stork, Philip A. and Zeng, Victor, The 2008 Beijing Olympic Sponsorships: Value for Money? (October 6, 2010. http://ssrn.com/abstract=1649132)  "use event study methodology to assess the net economic value of 2008 Beijing Olympic Games sponsorships." And with that they found that "investors judge the benefits that accrue to sponsoring companies to be commensurate with the expenses, as evidenced by insignificant announcement date abnormal returns. Furthermore, on the Games opening ceremony date the domestic sponsors’ share prices fall significantly while the international sponsors on average experience positive returns. The domestic firms’ sponsorship decision may have been based on national pride and emotional commitment, rather than on profit maximization."


So Olympics is more about pride than about tangible returns or development or growth or people or host cities or… well, pretty much everything else… And more: Olympic Games are economically inefficient allocations of funds for both public and private sector players involved... Now, there a harmony of sorts...

8/2/2014: Economics of Olympic Games: Part 3: Cost Overruns

In Part 1 I covered the macroeconomic impact of Olympics (http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part.html) while Part focused on labour market impact and the effect of the games on the host city (http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part_8.html)

So now, on to business case (cost-benefit and cost) estimates…

Remember all the cost overruns in Sochi? Spectacular, right? Unprecedented, right?

Flyvbjerg, Bent and Stewart, Allison, Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012 (June 1, 2012. Saïd Business School Working Papers, Oxford: University of Oxford, 23 pp: http://ssrn.com/abstract=2238053) looked at whether "different types of megaprojects have different cost overruns?

"In this study, we set out to investigate cost overruns in the Olympic Games. To do so, we examined the costs of the Games over half a century, including both summer and winter Olympics. We looked at the evolution of final reported costs and compared these to the costs established in the Games bids, submitted to the International Olympic Committee (IOC) up to seven years before the Games occurred. In so doing we established the largest dataset of its kind, and documented for the first time in a consistent fashion the costs and cost overruns for the Olympic Games, from 1960 to 2012."

So the findings are: "We discovered that the Games stand out in two distinct ways compared to other megaprojects:

1. The Games overrun with 100 per cent consistency. No other type of megaproject is this consistent regarding cost overrun. Other project types are typically on budget from time to time, but not the Olympics. 
2. With an average cost overrun in real terms of 179 per cent – and 324 per cent in nominal terms – overruns in the Games have historically been significantly larger than for other types of megaprojects, including infrastructure, construction, ICT, and dams." 

Or more succinctly: "The data thus show that for a city and nation to decide to host the Olympic Games is to take on one of the most financially risky type of megaproject that exists, something that many cities and nations have learned to their peril."

But, of course, London 2012 Games were different, right, cause that what is being claimed vis-a-vis Sochi 2014 experience… Err… "For the London 2012 Games, we find that:

1. With sports-related real costs currently estimated at USD14.8 billion, London is on track to become the most costly Olympics ever. 
2. With a projected cost overrun of 101 per cent in real terms, overrun for London is below the historical average for the Games, but not significantly so. 
3. The London cost overrun is, however, significantly higher than overruns for recent Games since 1999. London therefore is reversing a positive trend of falling cost overruns for the Games."

Sochi 2014 cost-benefit estimates are actually provided here: Pilipenko, Igor V., The Sochi 2014 Winter Olympics: The Cost-Benefit Analysis and Ways to Improve the Project Efficiency (September 25, 2013. Electronic Publications of Pan-European Institute, 4/2013, (ISSN 1795-5076), 52 p: http://ssrn.com/abstract=2333902)