Economic Multipliers and Mega-Event Analysis

Article excerpt

Abstract

Critics of economic impact studies that purport to show that mega-events such as the Olympics bring large benefits to the communities "lucky" enough to host them frequently cite the use of inappropriate multipliers as a primary reason why these impact studies overstate the true economic gains to the hosts of these events. This brief paper shows in a numerical example one way in which mega-events may lead to inflated multipliers and exaggerated claims of economic benefits.

Keywords: economic impact, sports, multipliers, mega-events

Introduction

Economists often criticize economic impact studies that purport to show that megaevents such as the Olympics,World Cup, or other sports championships such as the Super Bowl bring large benefits to the communities "lucky" enough to host them. These scholars frequently cite the use of inappropriate multipliers as one of the primary reasons why these impact studies overstate the economic gains to the hosts of these events (see Siegfried and Zimbalist (2000), Crompton (1995), or Baade and Matheson (2001) among others). Porter and Fletcher (2008) echo these concerns, going so far as to note that most academic journals will not publish economic impact studies generated using the most commonly used software packages.

The concept of multipliers is well established in the field of economics, however, and indeed the 1973 Nobel Prize in Economics was awarded to Wassily Leontief for his work in developing the macroeconomic input-output models used to derive multipliers. Therefore, it is not appropriate to simply reject, out of hand, all use of multipliers in mega-event impact analysis without a solid economic reason for doing so. The purpose of this paper is to demonstrate one justification for rejecting the use of standard economic multipliers in the analysis of the economic impact of mega-events.

Before proceeding further, it is important to more precisely define the terminology economists use when discussing multipliers. First, practitioners of economic impact analysis are often quite vague about the distinctions between economic impact, economic benefits, and increased spending and typically use these terms interchangeably. Of course, increased spending in an area does not necessarily lead to increased incomes, and an economy may not "benefit" in an appreciable way just because spending increases. While economists would most likely define the benefits of an event to a city as being related to the income generated for its citizens, economic impact reports invariably equate economic impact with spending, and, therefore, it is this that will be examined in this paper.

Economists also use two differing conventions in reporting multipliers. One method calculates the multiplier as equal to indirect spending divided by direct spending, so that a multiplier of 1 results in total spending being double that of the direct spending. Others, such as Humphreys (1994), report that the multiplier equals indirect spending plus direct spending all divided by direct spending, so that instead a multiplier of 2 implies a doubling of direct spending. The second convention seems more natural and more widespread, so it will be used in the remainder of this paper.

Economic impact analysis is generally done by estimating attendance at an event, surveying a sample of visitors as to their spending associated with the game or convention, and then applying a multiplier to account for money circulating through the economy after the initial round of spending. For example, an economic impact analysis for the American football championship game, Super Bowl XXVIII, in Atlanta in 1994 estimated 306,680 visitor days with a typical visitor spending $252 per day for a direct impact of $77.3 million. An economic multiplier of 2.148 is then applied for an indirect impact of $88.7 million and a total economic benefit of $166 million (Humphreys, 1994).

The economic multipliers used in these analyses are calculated using complex inputoutput tables for specific industries. …