The economic non-impact of stadiums and arenas

Peddlers of economic impact studies are modern day snake oil salesmen. Most economic impact studies would not be less credible if they were printed on toilet paper (but they would be more useful!). Exhibit A is the cost-benefit analysis used to justify the upgrade of the white elephant Claudelands Events Centre in Hamilton (see here and here, and note that things are not getting any better). Fudging the figures on cost-benefit analysis to justify public spending on sport and recreation facilities is nothing special to Hamilton either - see this recent post by Tim Harford on measuring (or should that be mis-measuring?) the benefits of the Olympic Games.

A new paper by Sam Richardson, published in New Zealand Economic Papers (sorry I don't see an ungated version anywhere), makes the case against any substantial economic impact of stadiums and arenas, based on New Zealand data. And New Zealand is not an outlier - Richardson's work simply adds to a mountain of existing research that says the same, not just for stadiums and arenas, but also conference centres and large events (on this topic I'm particularly looking forward to reading this book by Andrew Zimbalist, which has been on my to-be-read pile for too long, and which I will review here when done).

Economic impact studies typically go wrong in one (or often more than one) of three ways: (1) they use the wrong counter-factual; (2) they don't account for leakages to outside the local economy; and (3) they fail to consider the opportunity costs. In the first of these, many economic impact studies assume that all spending that relates to stadium events would not have been spent otherwise. Clearly, this is incorrect for local people attending events at the stadium, who probably would have spent that money anyway. In the second, many economic impact studies fail to recognise that not all spending associated with a stadium stays in the local economy. For instance, if a hot dog seller comes from out-of-town to service the event, then their income goes out of the local economy. In the third, almost all economic impact studies fail to consider what the next best use of the money spent on the stadium is, and the net benefits that alternative use could have generated.

Anyway, back to Richardson's work. He looks at the impact of stadium construction across 13 territorial authorities that built or upgraded 24 sports facilities over the period 1997 to 2009. Specifically he looks at the impacts on employment in the construction sector, and local GDP, both during and after construction. He finds:

that there is a statistically significant (judged in terms of a 10% significance level) increase in quarterly employment growth of 1.033 percentage points (p-value D 0.003) for each quarter during facility construction...

Model 1(b) shows the impact of the post-construction period for the combined facility projects, and there is no statistically significant impact...

Results for model 2(a) indicate that the aggregated facility during-construction coefficient is not statistically significant, indicating that facility projects in general did not have any impact on quarterly real GDP during construction. Results from model 2(b) show that the post-construction aggregate facility coefficient is also statistically insignificant.

In other words, there is a small impact on construction sector employment growth during the period of construction (no surprises there), but that the effect does not persist after construction. Probably the construction employment is only temporary because the large construction firms that engage in building stadiums and arenas bring in construction staff, but then move them onto the site of the next large project when the current one is complete. Even worse, there is no effect on local real GDP, either during or after construction. Now, we might expect a lesser impact of

Richardson concludes:

Results from this paper strengthen the conclusions of the majority of research throughout the scholarly literature in this field that sports facilities should not be relied upon as economic stimuli. They do not generate increases in long-term employment, and they have no impact on local area incomes (as measured by real GDP).

For more context on Richardson's work, see his blog (although I note that he hasn't posted for over two years, but there is good stuff there nonetheless).

[HT: Eric Crampton at Offsetting Behaviour]