Academic journal article
By Johnson, Bruce K.; Whitehead, John C.
Contemporary Economic Policy , Vol. 18, No. 1
JOHN C. WHITEHEAD [*]
Many state and local governments have subsidized the construction of arenas and stadiums for the use of professional sports teams. They often justify the subsidies by claiming the projects generate valuable public goods and positive externalities, though such benefits are difficult to measure. This article reports an application of the contingent valuation method (CVM) to measure the value of public goods generated by two proposed projects in Lexington, Kentucky: a new basketball arena for the University of Kentucky and a minor league baseball stadium. Neither project would generate sufficiently valuable public goods to justify public financing. Although the results cannot be generalized to other cases, they do shed light on some of the main issues involved, and they demonstrate the feasibility of applying CVM to the evaluation of subsidized stadiums. (JEL H41, L83)
The 1990s have seen a surge in sports stadium and arena building. In mid 1996, the total spending completed and planned for the decade topped $9 billion, with more than 80% of the funding provided by state and local governments (USA Today, 1996). Even more new sports building projects have been approved since 1996, and others have been proposed but not yet funded. For instance, Raleigh, North Carolina, agreed to build a new arena to attract a hockey team, and both the Yankees and the Mets have asked New York City to build new stadiums for them.
The building boom continues a trend begun in the 1950s. Most major league sports teams played in privately owned buildings in 1950, including 15 of the 16 baseball teams. By 1989, however, 77 of the 100 teams in major league baseball, football, basketball, and hockey played in publicly owned buildings (Quirk and Fort, 1992, pp. 131-133).
Although building stadiums and arenas has become popular among state and local governments, it has not proven financially lucrative for them. Quirk and Fort (1992, pp. 168-172) show that publicly funded sports buildings invariably fail to generate sufficient income for their owners to cover their total opportunity costs. Some fail even to cover their variable costs of operation.
Why, then, have so many governments built stadiums and arenas? In most cases, they have hoped to attract a new team or to prevent an existing team from leaving. Proponents of public stadiums claim the positive externalities of teams and the stadiums that make them possible are so powerful that total benefits of new stadiums exceed total costs. But because many of the benefits derive from externalities, no private investor could hope to capture enough of the benefits to justify constructing a stadium. Unless the government builds the stadium, then, a city could be worse off if it lost its team as a result. Of course, some teams do finance their own buildings and, presumably, expect to earn a profit. Recent examples include the Chicago Bulls, the Washington Redskins, and the Montreal Canadiens.
The positive externalities allegedly generated by sports teams create two types of benefits, indirect and direct. The indirect benefits arise if team- and stadium-related activities cause a net increase in an area's aggregate income. If, for instance, a new stadium attracts more tourists to town, production of hotel services, restaurant meals, and so on, will increase and, through a multiplier effect, will generate additional increases in income. But much of the increased income will accrue to firms other than the team.
The overwhelming weight of objective, scientific evidence suggests that stadiums do not generate significant increases in income. Economic impact studies purporting to justify public stadium financing suffer from serious flaws (Shropshire, 1995). Baade and Dye (1990), Noll and Zimbalist (1997), and Rosentraub (1996), among many others, demonstrate that stadiums and teams fail to generate measurable growth in regional economies. …