Question

Using the concepts of the substitution effect, leakages, and crowding out, discuss whether a small city like Indianapolis or a big city like Los Angeles would benefit more from hosting the NCAA Men’s Final Four Basketball Tournament.

Answer 1

Assessing the Economic Impact of the NCAA Basketball Tournament

The National Collegiate Athletic Association (NCAA) basketball tournament qualifies as a sports mega-event, and cities across the United States compete vigorously with one another to host what is, by most measures, the premier intercollegiate sporting event in the United States. The promise of substantial economic impact has convinced cities to “invest” substantial sums of money to meet the demands of the NCAA. Boosters claim that the “Final Four” typically induces an influx of approximately 50,000 visitors as well as exposure to millions of television viewers. Does this fan and viewer interest translate into elevated levels of economic activity for the host city?

Our analysis of Men’s NCAA tournaments since 1970 and Women’s NCAA tournaments since 1982 indicates that the economic impact for host cities for the year the event is hosted is on average small and negative for the NCAA Men’s Final Four and small and positive for the Women’s FF. The economic impact, particularly for the men’s tournament, appears to fall short of booster claims of a financial windfall. Furthermore, the economic impact does not correlate with either the size of the facility or the size of the city.. The sum of the evidence indicates that cities ought to exercise restraint in undertaking public spending to host the NCAA Final Four.

Introduction and a Brief History of the NCAA Basketball Tournament

The Super Bowl, Olympic Games, all-star games and league playoffs for the four major professional sports leagues, and the National Collegiate Athletic Association (NCAA) basketball tournament qualify as sports mega-events in the United States. Convinced that these sports events produce substantial incremental economic activity, cities compete as vigorously to host them as the athletes who participate in the events. Seduced by the promise of an economic windfall, cities have spent significant amounts of money to host the NCAA basketball tournament. Are the benefits derived from hosting tournament regional games or the NCAA Final Four (FF) as substantial as boosters claim? The primary purpose of this paper is to assess the economic impact of the NCAA FF. In so doing at least three other questions will be addressed. First, does the size of the host city correlate in some way with the economic impact induced by the event? Second, how does the economic impact of the FF for women (FFW) compare to that of the FF for men (FFM)? Third, does the size of the facility in which the FF games are played influence the economic impact? Before addressing these questions directly, it is useful to consider how the NCAA has evolved in a financial sense, and how the NCAA has been able to parlay the popularity of its basketball tournament into considerable wealth. The evolution of its television contracts provides some particularly meaningful insight. The NCAA basketball tournament currently commands among the most lucrative broadcast contracts in U.S. sports history. When the tournament began in 1939, few could have anticipated the financial significance the event would achieve. In the financial equivalent of an air ball, the National Association of Basketball Coaches, the event sponsors that first year, lost about $2,500 (Yoder,2002). Fifty years later the television broadcast rights alone for the tournament exceeded $100 million.

To be precise in 1991 CBS paid $143 million for television rights, an increase of $89 million from the 1990 rights fee of $54 million. In the latest contract iteration announced November 18, 1999, CBS Sports extended its current pact with the NCAA to 2014. The $6-billion, 11-year new contract, one of the largest in U.S. sports history, represents a 220 percent increase defined in annual terms over the 7-year, $1.725 billion deal which expired in 2002. CBS has had the TV rights to the Division I tournament since 1982, but it should be noted that the latest agreement between CBS and the NCAA includes merchandising rights for tournament related products as well as rights to the games content on the Internet (CNN money, 1999). The lucrative television contract reflects successful ratings. The FFM typically rates among the most watched sporting events for any given year. For example, in 2000, only the Super Bowl, the Orange Bowl, and the Olympics opening ceremony achieved ratings than the NCAA men’s championship game (Isidore, 2001). Despite a ratings slippage from previous years, the number of viewers for the NCAA men’s final exceeded the average rating for the World Series and the NBA finals average by almost 10 percent. Over the past five years the average share for the NCAA men’s final exceeded the World Series and NBA finals averages by more than 30 percent (Isidore, 2001).

Growth in gambling revenues related to the event provides additional evidence on the tournament’s significance in the world of sports. The Federal Bureau of Investigation estimates that $2.5 billion is bet illegally on the NCAA basketball tournament each year (Atkins, 1996). The NCAA has developed a financial dependency on the tournament; it derives 90 percent of its budget from the event. In all likelihood, Cedric Dempsey, the NCAA President, would be unlikely to command a salary of $525,000 per year in the absence of the tournament.

The popularity and economic success of the NCAA tournament has attracted interest from other quarters to include cities throughout the United States. At a time when cities have attempted to bolster their sagging economies through reinventing themselves as cultural or recreational destinations, the NCAA basketball tournament represents an event that fits that developmental strategy.Hosting a FF employs the tourist infrastructure cities have created in the last two decades. Utilization of this infrastructure is critical to the economic viability of the cultural destination strategy, and cities have competed vigorously for the NCAA tournament as a consequence.

Evidence on the NCAA’s success in negotiating with networks for the rights to broadcast their games indicates that the NCAA has learned to use their market power to extract monopoly rents. Cities have to pay at least in kind to host the event, and the sizeable public expenditure required to accommodate the tournament often necessitates convincing a sometimes skeptical public that the event’s public benefits exceed the civic costs. Economic impact studies relating to the FF have predictably proliferated. If we assume that cities are rational, then they presumably would not be willing to pay more to host a FF than the benefits derived from the event. Assuming that cities have perfect Scholars refer to the early 1980s as the post-federalist period. The Reagan administration had reduced federal revenue sharing, and, this development coupled with the flight of businesses from city centers, compelled a more entrepreneurial approach on the part of cities to their economic problems. These forces as well as financial developments in professional sports explain in large measure the spate of stadium, convention center, and hotel construction that has occurred in cities throughout the United States in the last two decades. It could be argued that if multiple cities bid for the event, then the winning bid is likely to exceed the event’s marginal revenue product. It is in the interest of the NCAA to encourage as many cities as possible to bid for its tournament.information relating to the impact of the FF, then the price they pay to host it will not exceed their perceived marginal social product. Using the upper bound for estimating the cost a city incurs in hosting a FF would be the incremental economic activity the event stimulates. Indeed, if the NCAA appropriates all monopoly rents, then in a world of perfect information, the cost to the city equals the estimated economic impact.

City Perceptions on the Economic Impact from the NCAA Basketball Tournament

The estimated economic impact for the NCAA Final Four basketball varies widely as do the estimated impact for all sports mega-events. For example, a series of studies for the NBA All-Star game produced numbers ranging from a $3 million windfall for the 1992 game in Orlando to a $35 million bonanza for the fame three years earlier in Houston (Houck, 2000). In January 2001, The Sporting News designated Indianapolis as “the Best Final Four Host.” In celebrating the designation, the Indianapolis Convention & Visitors Association (ICVA) indicated that the 2000 FFM, which Indianapolis hosted, brought an estimated 50,000 visitors to Indianapolis and generated $29.5 million in economic impact (ICVA, 2001). This estimate of economic impact equaled slightly more than onequarter of the $110 million economic impact estimated for a FFM reported in a 2001 article about the impact of the NCAA tournament (Anderson, 2001). The authors found a low booster economic impact estimate for the FFM registered $14 million, or approximately 13 percent of the high estimate (Associated Press, 1998).

Estimates for the FFW typically run less than that for the men’s tournament, and the authors’ research indicated a range of $7 million, for the FFW in Cincinnati in 1997 (Goldfisher, 1999) to $32million for the event hosted by San Jose in 1999 (Knight Ridder News Service, 1999). In deriving his economic impact estimate for Cincinnati, Donald Schumacher opined: “‘Our feeling is that the dollars that those people were to spend on entertainment and food was going to happen anyway.’” (Knight Ridder News Service, 1999)

Economists Robert Baade and Victor Matheson (2000) also challenged an NFL claim that as a result of the 1999 Super Bowl in Miami, taxable sales in South Florida increased by more than $670 million dollars. Their study of taxable sales data in the region concluded that the NFL has exaggerated the impact of the Miami Super Bowl by approximately a factor of ten even when using assumptions that favored identifying a strong economic impact.

Are booster estimates on the economic impact of the NCAA basketball tournament similarly inflated? Given that these estimates often serve as a justification for significant expenses incurred in hosting the FF, the answer to this question should concern public officials. Theoretical issues that have implications for the size of the economic impact estimates are identified and analyzed in the paper’s next section .

Theoretical Issues

The exaggeration of benefits induced by a sports mega-event occurs for several reasons. First, the increase in direct spending attributable to the event may be a “gross” as opposed to a “net” measure. Direct spending has been estimated by some subsidy advocates through simply summing all receipts associated with the event. The fact that the gross-spending approach fails to account for decreased spending directly attributable to the event represents a major theoretical and practical shortcoming.

Eliminating the spending by residents of the community would at first blush appear to account for a significant source of bias in estimating direct expenditures. Surveys on expenditures by those attending the event, complete with a question on place of residence, would appear to be a straightforward way of estimating direct expenditures in a manner that is statistically acceptable. While such surveys may well provide acceptable spending estimates for those patronizing the competition, such a technique, however, offers no data on changes in spending by residents not attending the event. It is conceivable that some residents may dramatically change their spending during the competition given their desire to avoid the congestion at least in the venue(s) environs. A fundamental shortcoming of economic impact studies, in general, pertains not solely to information on spending for those who are included in a direct expenditure survey, but rather with the lack of information on the spending behavior for those who are not.

Failure to account for this important distinction between gross and net spending has been cited by economists as a chief reason why sports events or teams do not contribute as much to metropolitan economies as boosters claim (Baade, 1996). The national appeal of the NCAA tournament, however, arguably allows for a convergence of the gross and net spending figures given the fact that the attendees come from outside the host city. A national sporting event could be characterized as “zero sum” from a national perspective, while still exercising a strong, positive economic impact on the host city. Stated somewhat differently, spending at the NCAA basketball tournament qualifies as export spending since most of it is thought to be undertaken by people from outside the city.

A second reason economic impact may be exaggerated relates to what economists refer to as the “multiplier,” the notion that direct spending increases induce additional rounds of spending due to increased incomes that occur as a result of additional spending. Hotel workers and restaurant workers experience increases in income, for example, as a consequence of greater activity at hotels and restaurants. If errors are made in assessing direct spending, those errors are compounded in calculating indirect spending through standard multiplier analysis. Furthermore, precise multiplier analysis includes all “leakages” from the circular flow of payments and uses multipliers that are appropriate to the event industry. Leakages may be significant depending on the state of the economy. If the host city is at or very near full employment, for example, it may be that the labor essential to conducting the event resides in other communities where unemployment or a labor surplus exists. To the extent that this is true, then the indirect spending that constitutes the multiplier effect must be adjusted to reflect this leakage of income and subsequent spending.

Labor is not the only factor of production that may repatriate income. If hotels experience higher than normal occupancy rates during a mega-event, then the question must be raised about the fraction of increased earnings that remain in the community if the hotel is a nationally owned chain. In short, to assess the impact of mega-events, a balance of payments approach should be utilized. That is to say, to what extent does the event give rise to money inflows and outflows that would not occur in its absence? Since the input-output models used in the most sophisticated ex ante analyses are based on fixed relationships between inputs and outputs, such models do not account for the subtleties of full employment and capital ownership noted here. As a consequence, it is not clear if economic impact estimates based on them are biased up or down.

As an alternative to estimating the change in expenditures and associated changes in economic activity, those who provide goods and services directly in accommodating the event could be asked how their activity has been altered by the event. In summarizing the efficacy of this technique Davidson opined.