Economic Impact Analysis versus Cost Benefit Analysis: The Case of a Medium-Sized Sport Event

By Taks, Marijke; Kesenne, Stefan et al. | International Journal of Sport Finance, August 2011 | Go to article overview

Economic Impact Analysis versus Cost Benefit Analysis: The Case of a Medium-Sized Sport Event


Taks, Marijke, Kesenne, Stefan, Chalip, Laurence, Green, B. Christine, Martyn, Scott, International Journal of Sport Finance


Abstract

This paper empirically illustrates the difference between a standard economic impact analysis (EIA) and a cost-benefit analysis (CBA). The EIA was conducted using an existing (input-output) I-O model (STEAM). The benefit side of the CBA included non-local visitor spending, the revenue of the local organizing committee (LOC), the consumer surplus, and public good value of the sport event for the local residents. The cost side of the CBA was estimated based on the opportunity costs related to the construction of the stadium (including labor costs and the cost of borrowing), imports, and ticket sales to locals. The EIA indicated that the 2005 Pan-American Junior Athletic Championships generated a net increase in economic activity in the city of $5.6 million. The CBA showed a negative net benefit of $2.4 million. Both methods presented challenges and limitations, but CBA has the distinct advantage that it identifies the net benefits associated with hosting a sport event.

Keywords: cost-benefit analysis, economic impact analysis, event attendees, expenditures, local residents, spectators, sport event visitors

Pitfalls, misinterpretations, and miscalculations of economic impact studies are well documented in the literature (e.g., Baade & Matheson, 2006; Crompton, 1995; Hudson, 2001; Késenne 1999; Putsis, 1998). Often times, economic impac t studies yield a gross overestimation of the net benefits that cities receive in hosting sports events (e.g., Baade & Matheson, 2001; Coates & Humphreys, 1999, 2002; Dwyer et al., 2005; Lee, 2001; Matheson, 2009; Porter & Fletcher, 2008; Schaffer, Greer, & Mauboules, 2003). Authors therefore propose to use other techniques to estimate the economic value and/or benefit of sport events, such as cost-benefit analysis (CBA; e.g., Késenne, 2005), computable general equilibrium (CGE; e.g., Dwyer, Forsyth, & Spurr, 2006a), or contingent valuation techniques (CVM; e.g., B. Johnson & Whitehead, 2000; B. K. Johnson, Groothuis, & Whitehead, 2001). The purpose of this paper is to contrast and compare the outcomes of a standard economic impact analysis (EIA) based on input-output (I-O) modeling with a CBA for a medium-sized international sport event. The event under investigation is the Pan-American Junior Athletic Championships, which was hosted in a medium-sized city in a Canadian province.

Challenges of Economic Impact Studies

Economic Impact Analysis (EIA)

Standard EIA is often based on multiplier analysis, using I-O modeling. The multiplier analysis converts the total amount of additional expenditure in the host city to a net amount of income retained within the city after allowing for leakages through the local economy (Gratton & Taylor, 2000). Major criticisms of standard EIA based on I-O relate to the usage of inappropriate and overinflated multipliers (e.g., Matheson, 2009), and/or negative effects being ignored (e.g., Barget & Gouguet, 2010; Dwyer at al., 2005, 2006a; Késenne, 2005; Porter & Fletcher, 2008). Porter and Fletcher (2008) argued that I-O models are long-run models and are, therefore, inadequate to predict the impacts of the demand shock of short-term events. Dwyer et al. (2005, 2006a, 2006b) endorsed the criticisms of standard EIA and suggested using the CGE approach, which incorporates positive as well as negative impacts for the economy as a whole. The authors further argued that, for smaller events in small cities, I-O analysis may be appropriate to assess local impact because the overestimations are "not likely to be too large at this level of analysis" (Dwyer et al., 2006a, p. 61).

The size of the event plays a role; negative impacts of large events in other parts of the regional and national economy are more obvious than the negative effects of smaller events. For instance, it is unlikely that the Pan-American Junior Athletic Championships, as a medium sized sporting event, affected exchange rates and/or other import and export competing industries.

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