26/2/18: South Korea Avoids Sunk Cost Fallacy

As shown consistently by economists, Olympic Games are a vanity project that wastes public resources, scarce public resources. In this case, South Korea's swift decision to demolish (https://www.aol.com/article/news/2018/02/22/south-korea-plans-to-demolish-newly-built-olympic-stadium/23368450/) its flagship Olympic stadium is a welcome case of cutting the future costs of maintaining the White Elephant. Or, in terminology of VUCA management: an act of avoiding the sunk cost fallacy.

You can read on economics of Olympic Games (err... Olympic waste) by following links from here: http://trueeconomics.blogspot.com/2014/02/922014-economics-of-olympic-games-part.html and http://trueeconomics.blogspot.com/2012/08/282012-bit-of-olympic-bubble.html and here: http://trueeconomics.blogspot.ie/2012/10/18102012-some-tough-love-from-stats-for.html. Have fun.

In the mean time, make sure you know your stance should your city/country attempt to bid for the next Olympic Waste.

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)

8/2/2014: Economics of Olympic Games: Part 2: Labour Market & Host City Impacts

In Part 1 of the post I covered macroeconomic impact of Olympic Games:  http://trueeconomics.blogspot.ie/2014/02/822014-economics-of-olympic-games-part.html

Here, let's take a look at labour market impact and the effect of the games on host cities. As before, emphasis is mine.


Labour markets outcomes?

Feddersen, Arne and Maennig, Wolfgang, Mega-Events and Sectoral Employment: The Case of the 1996 Olympic Games (March 2010. http://ssrn.com/abstract=1868805) used the 1996 Olympic Games in Atlanta, "which are also outstanding as one of the very few large sporting events where ex post academic analysis found significant positive effects." The study looked at 16 different sub-sectors of the economy, extending previous studies econometric methodology.

Key finding: "Regarding the Olympic effect, hardly any evidence for a persistent shift in the aftermath of or the preparation for the Olympic Games is supported. We find a significant positive employment effect in the monthly employment statistics exclusively during the staging of the Olympic Games (July 1996). These short-term effects are concentrated in the sectors of 'retail trade', 'accommodation and food services', and 'arts, entertainment, and recreation', while other sectors showed no such effects."


And worse: Willner, Jonathan and Aravantinos, Elias, Impact of the 1996 Summer Olympic Games on Unemployment in Georgia. (Southwestern Journal of Economics, Vol. 7, No. 1, 2004: http://ssrn.com/abstract=761825) find negative effects.

"Atlanta's 1996 Olympic Games were considered the most successful Olympics in the history of the event. Success in this case is based on financial considerations. There is no doubt that there was a tremendous economic activity associated with not only the city but much of the state of Georgia. Additionally it is well known that the Olympic Games are not a typical sport event, but a social event with several economic and financial extensions."

However, "At issue is whether the Olympic Games constitute a consumption or investment activity. We look at multiple measures of labor market changes in Georgia around the Olympics. We find limited positive effects on employment levels in counties close to but that did not have Olympic venues. Further we find that some measures of Olympic effects on labor market measures are startlingly negative."


But what about the fabled host city impact?

Nitsch, Volker and Wendland, Nicolai, The IOC's Midas Touch: Summer Olympics and City Growth (August 30, 2013. CESifo Working Paper Series No. 4378. http://ssrn.com/abstract=2319870) show that "Hosting a mega-event is a costly activity of short duration. Still, cities frequently compete to become host of all types of events."

So for Summer Olympics, using a difference-in-differences methodology, the authors looked at "the rates of population growth of Olympic cities, candidate cities and other large cities in host and candidate countries over the period from 1860 to 2010. We find that, following the Games, host cities experience a measurable decline in population growth relative to cities in the control group. Our results indicate that being awarded the Summer Olympics has, on average, a negative impact on cities."



How on earth can this be the case if there are alleged cultural, marketing etc opportunities presented by the Olympics? Right, may be it is due to the sole large benefit the games provide? Yep, the old-fashioned property boom.

Kavetsos, Georgios, The Impact of the London Olympics Announcement on Property Prices (June 9, 2012. Urban Studies, Vol. 49, No. 7, 2012: http://ssrn.com/abstract=1552322) "estimates the impact of the London 2012 Olympics announcement on property prices. Using a self-constructed dataset of a sample of property transactions, it is estimated that properties in host boroughs are sold between 2.1 and 3.3 per cent higher, depending on the definition of the impact area. A similar investigation based on radius rings suggests that properties up to three miles away from the main Olympic stadium sell for 5 per cent higher. It is estimated that the overall impact on the price of properties in host boroughs amounts to £1.4 billion, having substantial social and financial implications for existing residents."

So property becomes more expensive... what do you think happens to larger families with kids? And to potential would be migrants who would have moved into the city?


Never mind macroeconomic effects (negative) and labour market effects (negative) and host cities impact (negative)... may be there is a business case to be made for hosting Olympics? Tune in to the next post...

8/2/2014: Economics of Olympic Games: Part 1: Macroeconomic Impact

Part one of the series of posts summarising some economic evidence on the effect of Olympics on host economy. Emphasis within quotes is mine.


Cost-Benefit of Olympics in macroeconomic context:

McHugh, Darren, A Cost-Benefit Analysis of an Olympic Games (August 2006. http://ssrn.com/abstract=974724) estimated "the net benefit to Canada of the Vancouver 2010 Winter Olympic Games. Two particular classes of problems in Olympic CBA are studied in detail":

1. "the unique nature of project dependency in an Olympic Games, and this is surmounted by the classification of Olympic-related costs and benefits as "Event-related" or "Infrastructure-related", with rules for handing each in the context of a CBA for an Olympic Games."
2. "the estimation of net benefit of three types of "Olympic Outputs", namely the Olympic Spectacle, the Olympic Halo (the feelings of pride engendered in the residents of the host city), and the tourism induced by an Olympic Games."

Key results:

• "a correct accounting of induced Olympic tourism shows that the net benefit of this tourism is substantially less than its widely touted "economic impact". 
• "Although a detailed estimation of infrastructure costs and benefits is outside the scope of the paper, their contribution to the net benefit of the Games under the proposed project accounting rules is clearly negative."
• "The net benefit of the Olympic Games is therefore also substantially negative when the estimates of Olympic benefits from this paper are combined with published estimates for event costs."

Long-run v short-run outcomes from macroeconomic perspective:

Ferris, Stephen P. and Koo, Sulgi and Park, Kwangwoo and Yi, David T., Gold, Silver, Bronze or Tin? The Short and Long Term Effects of Mega Sporting Events (July 1, 2012. KAIST Business School Working Paper Series No. 2012-005. http://ssrn.com/abstract=2104963)

"This paper examines the short and long term effects of the Summer Olympics, Winter Olympics, and the World Cup on the economy of the host country."

The core finding: "selection for hosting the Summer Olympics only produces a significant positive announcement period effect in the host country’s domestic equity market. This effect however resides solely in the construction and building materials industry."

Beyond this rather shallow impact, "the Summer Olympic game hosting nations generate significant positive economic performance up to 3 years prior to hosting the event, while this positive economic performance disappears 1 year after hosting such an event."

Overall: "Our results suggest that contrary to the conventional claims by mega sports organizers, it appears that there are no significant long-run economic gains from hosting such mega sporting events."



Only positive impact discovered to-date is via exports channel:

Rose, Andrew K. and Spiegel, Mark M., The Olympic Effect (April 2009. NBER Working Paper No. w14854. Available at SSRN: http://ssrn.com/abstract=1376157)

"Economists are skeptical about the economic benefits of hosting "mega-events" such as the Olympic Games or the World Cup, since such activities have considerable cost and seem to yield few tangible benefits. These doubts are rarely shared by policy-makers and the population, who are typically quite enthusiastic about such spectacles." Obviously, rarely there is a surprise to be found in a discovery that politicians and public tend to disagree with economics... but...

"In this paper, we reconcile these positions by examining the economic impact of hosting mega-events like the Olympics; we focus on trade. Using a variety of trade models, we show that hosting a mega-event like the Olympics has a positive impact on national exports. This effect is statistically robust, permanent, and large; trade is around 30% higher for countries that have hosted the Olympics."

Is that it, then? Not really. "Interestingly however, we also find that unsuccessful bids to host the Olympics have a similar positive impact on exports."

Why? "We conclude that the Olympic effect on trade is attributable to the signal a country sends when bidding to host the games, rather than the act of actually holding a mega-event."


Note: couple other papers were profiled earlier on this blog: http://trueeconomics.blogspot.ie/2012/10/18102012-some-tough-love-from-stats-for.html
http://trueeconomics.blogspot.ie/2012/08/282012-bit-of-olympic-bubble.html


Stay tuned for labour market impact and local regional impact studies summaries...