“The Winner’s Curse” by John Edward

John Edward, who teaches economics at Bentley and UMass Lowell, frequently contributes columns on economic issues. Here are his views on the possibility of the Olympics coming to Boston. Coincidentally, today’s Globe has an editorial urging Olympic organizers to include Gateway Cities like Lowell in the Olympic planning process:

The Professor walks into class with a glass jar full of coins. He asks students to estimate the amount of money in the jar. He also has them submit a bid. The highest bidder wins the contents of the jar. The students learn about the winners curse. The professor walks out with a profit.

Are Boston area residents going to experience the winners curse? Most likely yes, if the city is “lucky” enough to win the bid for the 2024 Summer Olympics.

Two Boston University Economics Professors conducted the jar of coins experiment. The jar had $8.00 in coins. The average estimate was only $5.13. The average highest bid was $10.01. The average “winner” actually lost two dollars.

Andrew Zimbalist is a well-respected sports economist from Smith College. He recently published a book titled Circus Maximus: The Economic Gamble behind Hosting the Olympics and the World Cup. Boston’s bid really is a gamble, as Professor Zimbalist reveals potential curses.

Cost Overruns

The final costs of hosting the Games are much higher than the initial bid. For the London (2012) Olympics the final cost was between four and five times greater. It looks like the result will be similar for the Games in Brazil (2016).

Unrealistic Multipliers

The big promise of Olympic backers is economic stimulus and job creation. Promotional studies base the estimates for economic output and jobs on a multiplier effect. The multiplier effect is real. The magnitude of the multiplier is over-stated, often by a lot.

Professor Zimbalist reviewed bid promotions and found assumed multipliers ranging from 1.7 to 3.5. He then analyzed the faulty assumptions that those multipliers are based on. His conclusion is that the actual multiplier for cities hosting major sporting events is in the range 0.7 to 1.1. Due to money leaking out of the local economy, the increase in economic output may actually be less than the money spent at the Olympics.

Questionable Impact on Tourism

Estimates for tourism are also overly optimistic. A detailed study of the impact of the Atlanta (1996) games found “no statistically significant change in retail sales, hotel occupancy, and airport traffic during the Olympics.” Sydney (2000) saw an increase in tourism in their Olympic year but far below projections. The London games actually resulted in a decrease in tourism. Host cities also experience a big jump in reverse tourism, as local residents escape during the games.

Studies of the long-term impact on tourism are equally pessimistic. For the three years after the Sydney Olympics, tourism fell significantly.

Labor Market, Real Estate Market, and Infrastructure Conditions

Existing economic conditions make a big difference. If unemployment is high construction jobs can help a lot. If the real estate market is weak, the games can provide a needed boost. If the host area already has appropriate venues then costs will be much lower and there will be less disruption. Games developed under these conditions are much more likely to succeed.

Unemployment in Massachusetts is down to 4.7 percent. Construction is already booming in Boston. Due to lack of adequate venues, the Boston 2024 planners are now talking about farming out events to as far away as Chicago.

Real Estate Prices

Forbes magazine recently ranked Boston as the third most over-priced metropolitan area in the United States. The Dukakis Center for Urban and Regional Policy at Northeastern University ranked the Boston area as having the third-highest rents. They describe current conditions as a housing crisis. Many of the students now graduating from area colleges are leaving because they cannot afford to stay. Companies have difficulty hiring due to the lack of affordable housing.

One consistent result of hosting the Olympics is a rise in real estate prices. For Boston, higher property prices would be a winners curse.

The Planning Process

Professor Zimbalist cites Barcelona (1992) as “the poster child of success for cities hosting the Olympic Games.” Barcelona benefited from having labor market, real estate market, and infrastructure conditions better suited for success. The Barcelona story also varies from Boston in a very important way.

Boston Mayor Walsh recently announced an effort to produce the city’s first Master Plan in fifty years. A final draft may be ready in the summer of 2017. That is the same year when the International Olympic Committee will award the 2024 Games to a host city.

Barcelona developed their “master plan” before even deciding to submit an Olympic bid. Boston is putting the proverbial cart before the horse. At this point there is no way of knowing if hosting the Games will be compatible with the goals of Boston’s development plans. Moreover, a valid concern would be that the Games would have undue influence on the planning process. If Boston has a 2017 Master Plan, civic leaders, with community involvement from the start, could then evaluate bidding on the 2028 Summer Olympics.

Before and After Studies

The bottom line: based on Professor Zimbalist’s survey of economic impact studies of hosting the Olympics (and the World Cup), the results of Ex Post (i.e., after the fact) studies vary significantly from Ex Ante (i.e.; predictive) studies. Focusing on the impact of the games on employment and income, he finds “the much more common outcome of no positive effect.”

Opportunity Cost

As discussed in my last column there will be lost opportunities. Evaluating prior host cities, Zimbalist cites “the opportunity cost of the human capital invested by engineers, planners, and politicians in the preparation for and implementation of the games. Their skills and time could have been dedicated to other, perhaps more beneficial activities.”

At this point you might be wondering if the commission to examine the feasibility of bidding on the games considered the prevailing economic analyses. Professor Zimbalist relays the story that now Senate President Rosenberg asked him to serve on the commission. Two other noted experts in the field, one from Harvard, another from Holy Cross, were recommended. The 11-member commission appointed by the Governor and the legislature featured public officials and executives from the construction and tourism industries. None of the recommended experts, or any others, was appointed.

The phrase “Bread and Circuses” refers to seeking public approval via diversion rather than good public policy. It makes the title of Professor Zimbalist’s book – Circus Maximus, very appropriate.

Bentley University (where I teach) had Scott Blackmun, CEO of the U.S. Olympic Committee, as a commencement speaker last week. He spoke of the qualities and character of Boston’s vision for the Olympics.

Seems to me Boston’s vision for hosting the Olympics, to the extent it has a vision, is cloudy at this point. Beware the winners curse.

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