Author: Dan Alessandro (Weinberg ’19)
This project was originally published in the spring of 2017.
Financing an Olympic Games is a daunting undertaking for any city, almost invariably leading to millions or billions of dollars lost. Historically, hosting the Olympics has been a highly competitive process, with many cities vying for the privilege to be on the world’s stage and to bring money into the local economy. However, after the disaster of the 2016 Rio de Janeiro Olympics and more economic studies coming out, cities are starting to reconsider the economics behind hosting the Olympics and there has been a sharp decline in the number of Olympic bids. The 2024 Summer Olympics only have two bids from host cities, compared to an average of 8.4 bids across the 2000-2016 Olympics and the 2022 Winter Olympics only received two bids from host cities, compared to an average of 7.5 bids across the 2002-2014 Olympics. This paper will explore whether this growing doubt among potential host cities is backed by sound economic reasoning. Part I will examine the economic benefits of hosting the Olympics, Part II will examine the economic costs of hosting the Olympics, and part III will conclude and provide an alternative to the current host city selection process.
Part I: The Economic Benefits
The purported economic benefits of hosting the Olympics can be grouped into two buckets: short-run benefits and long-run benefits. Short-run economic benefits include indirect revenues from increased tourism, an economic stimulus from the construction that occurs in advance of the event, and direct revenues associated with the Olympics.
Many ex-ante studies of the Olympics are commissioned by parties with a vested interest in a given city landing the Olympics. Such private parties include hotels, investment banks, construction companies, and architecture firms that all stand to profit greatly from the Olympics being held locally, so they hire both PR and consulting firms to convince the government of the Olympics’ economic benefits. As a result, these consultancies’ studies projecting Olympic revenue greatly overestimate the amount of money brought into the local economy as a result of the boost to tourism. An example of such an optimistic projection was an InterVISTAS Consulting report that the 2010 Vancouver Olympics would increase economic output by $10.7 billion (InterVISTAS). When compared with scholarly ex-post studies of how much economic impact an Olympic Games had, there is a stark disconnect. These ex-post studies analyze the actual economic data generated before, during, and after the Olympic Games and control for other variables using econometric techniques. Such ex-post studies consistently find significantly smaller economic impacts than were predicted in advance of the Games (Baumann and Matheson). One such study examined the 1996 and 2002 Olympics and found that the Games caused no significant impacts on taxable sales, hotel occupancy, or airport usage in the hosting cities (Porter and Fletcher). Another study conducted an ex post analysis of the Sydney Olympics and found that the Olympics “generated a loss in Australian real private and public consumption in present value terms of $2.1 billion” (Giesecke and Madden 230).
The question then arises of why this disconnect exists and why ex-ante reports are so overly optimistic about the economic benefits that the Olympic Games will bring. A closer examination shows that the ex-ante reports contain many serious methodological flaws. The first flaw is a failure of such studies to account for the substitution effect, whereby local people spend money on going to an Olympic competition that they could have spent elsewhere in the local economy, for example at a local restaurant or theater. Thirteen percent of World Cup tickets in 2014 were sold exclusively to Brazilians (Baumann and Matheson). These reports classify such expenditures as Olympic tourists contributing to the local economy, even though there is no money being contributed that wouldn’t have been contributed otherwise. Thus, the studies are analyzing accounting profit, when they should be considering economic profit. The second reason that such economic impact reports are overly optimistic is that they greatly overestimate the multiplier effect. These studies typically use input-output models that assume that when one economic sector expands, it leads to an expansion of a second economic sector, which affects a third sector and so on. This generates a multiplier for local spending, which usually ranges between 1.7 and 3.5 in such reports, but ranges between 0.7 and 1.1 in reality (Zimbalist 37). The third reason why local revenues are overestimated is a leakage of money out of the local economy. The ex-ante studies operate under the assumption that one additional dollar spent within a city translates to one extra dollar added to the local economy of the city, which will be re-invested, or spent in another sector. This assumption is flawed. During the Olympics, hotel rooms sell for three to four times their normal prices, but this doesn’t translate to maids or bellhops being paid three to four times higher wages (Baumann and Matheson). These hotels are often international chains, so extra profits are repatriated to the hotel chain’s home country. The multiplier is calculated as 1/(1-MPC) and the marginal propensity to consume in the host city falls when money leaks out of the local economy, making the multiplier effect much smaller. Hindsight is 20/20, but the models projecting Olympic profits could be greatly improved if they were conducted by academic third-parties who would more rigorously examine their assumptions and not have conflicts of interests.
Aside from the overestimations of local revenue per tourist, the projections on how the Olympics will increase tourism numbers are deeply flawed as well. A major claim of Olympic promoters is that hosting the Olympics will bring many sports fans to the city who wouldn’t have visited otherwise. However, tourism in fact fell in the months Beijing hosted the 2008 Olympics and in the months that London hosted the 2012 Olympics, compared with the number of tourists that visited in the respective months in the previous year for each city. This is true even when including athletes, members of the media, Olympic tourists, and administrators of the Olympics (Zimbalist 37). The reason for a net downtick in tourism during the Olympics is that sports fans greatly displace regular tourists. Regular tourists are less likely to visit a city during the Olympics due to the overcrowding, disruption, and substantially higher prices that all exist in a city while hosting the Olympics. If local hotels and restaurants in a city would have been otherwise full with regular tourists instead of sports fans visiting to see the Olympics, then there may not be a net increase in economic activity generated by the Olympics. It’s also possible that increased tourism numbers during the Olympics can’t be attributed to the Olympics themselves. Tourists may have planned a trip to a city anyways, but simply moved up their timing to go during the Games. This doesn’t represent added tourism; it merely represents a change in timing for one cohort of tourists.
Aside from increased tourism during the several-week period of the Olympics, host cities hope for long-term tourism benefits after their city is showcased to the world by hosting the Games. Proponents of Olympic bids claim that the branding effects of the Olympics allow a city to bring in more international interest and tourism in the long-run. Such proponents typically point to Barcelona as an example. Before hosting the 1992 Olympics, “Barcelona was the 13th most popular tourist destination in Europe with fewer than half the number of bed nights as its neighboring rival, Madrid” (Baade and Matheson 212). After the Olympics highlighted Barcelona’s artistic, cultural, and architectural appeal, tourism boomed. Twenty years later, in 2002, Barcelona was the fourth most visited city in all of Europe. However, the results on long-run tourism are mixed when comparing Barcelona with several other host cities. Following the Olympics, Sydney experienced three years of negative tourism growth (ETOA). The issue with relying on the Olympics to promote long-run tourism is that the tourists who go to the Olympics are sports fans who are intently focused on the competitions, but not on the other attractions of the cities. According to the European Tour Operators Association, the most effective way to advertise tourism is word of mouth, which is lost when a tourist returns home and mostly talks about the temporary sporting attractions, rather than the permanent attractions that a city has to offer. In one report, the ETOA even stated that the Olympics leads to a net negative long-run effect on the demand tourism due to the displacement of normal tourists who would have marketed the city by word of mouth. The ETOA goes as far as to say that the Olympics’ removal of these normal tourists has such a negative effect, that it outweighs the positive effects of displaying the host city on television across the world. In reality, the effects of the Olympics on long-run tourism are probably dependent on many factors contextual to a given city. A city such as Barcelona could benefit from the Olympics because it has many attractions outside of the competitions itself that aren’t widely known about across the world and are positively advertised internationally on television. In contrast, a city like Atlanta without many attractions, or a city like London that is already very well-known worldwide doesn’t stand to gain much long-term tourism from hosting the Olympics.
The most reliable short-term economic benefits from hosting the Olympics are the revenues directly related to the Olympics, including broadcast rights, sponsorships, ticketing, and licensing. The 2010 Vancouver Olympics generated $2.8 billion in revenue and the 2012 London Olympics generated $5.2 billion in revenue. Television rights are the largest source of revenue, totaling 47.8 percent of revenue across the two games. Unfortunately for host cities, the International Olympic Committee (IOC) has been progressively getting a larger cut of TV revenue than the local organizing committees for the Olympic Games (OCOGs) over time. When the Olympics started to be broadcasted, the IOC received 1-4% of TV rights fees, but that proportion has steadily increased, and now the local OCOGs only receive 30% of television revenues (Zimbalist 15). The IOC’s policy is to share a fixed amount of television revenues with OCOGs, rather than a percentage, so as television revenues have risen, host cities have received a flat payment over time. The economic cause of this revenue division is the market power of the IOC. The IOC is essentially a monopolist who can sell the product of the Olympics with very favorable terms to a potential buyer, since the buyer can’t buy the rights to host an Olympics from any other seller.
The final economic benefit touted in association with the Olympics is the infrastructure that is initially created to accommodate the Olympics, but ends up providing long-term economic benefits. The IOC requires host cities to provide lodging for athletes and spectators. The city also is required to provide sufficient transportation throughout the city and between the city and all competition locations. Although the positive economic impacts of this added infrastructure are difficult to assess, it is reasonable to believe that having improved transportation systems and other infrastructure aids the local economies. The costs of this infrastructure will be discussed in part II.
Part II: The Economic Costs
It is extraordinarily expensive for a city to host the Olympics. Costs begin eleven years in advance of hosting the games with a highly expensive bidding process, continue as both sports and non-sports infrastructure must be built in preparation, and last throughout the games in the form of operating costs. Beijing spent over $40 billion hosting the Games in 2008 and Sochi spent over $50 billion for the 2014 Games (Zimbalist). The revenues discussed in part I pale in comparison to these immense costs; Beijing generated an estimated $3.6 billion from its Olympics, good for a return on investment of -751%. Such great losses are commonplace when it comes to hosting the Olympics. The only Olympics in recent memory to turn a profit was the Los Angeles 1984 Games, which produced a $215 million surplus. This section will explore each bucket of costs associated with hosting the Olympics in detail.
The first major cost for the host cities is the bidding process. Eleven years in advance of the Olympics, countries call for bids from prospective cities, and those cities compete amongst each other for their respective country’s bid. Nine years before the games, countries select their “applicants”, which pay the IOC a $150,000 fee to be considered. This group is later pared down to a group of “candidate” cities, which pay the IOC $500,000 more for the ability to be considered. The expenses tied to bidding go far beyond the fees paid to the IOC. Any prospective city must create a plan, hire consultants, and create promotional materials. Cities must also travel to IOC meetings, host IOC executives, and conduct extensive studies on the feasibility of hosting the games. Chicago and Tokyo each had failed bids to host the 2016 Olympic Games. Chicago’s failed bid cost over $100 million and Tokyo’s failed bid cost over $150 million (Zimbalist). The bidding period is an ongoing process of one-upmanship where cities are competing to impress the IOC with lavish displays of their plans including improved transportation infrastructure, new sporting facilities, and heightened security.
There are fears that this bidding process eliminates possible gains from the Olympics, due to the principal-agent problems as well as the winner’s curse and incomplete information. A principal-agent problem occurs when private interests that stand to profit from the Olympics are pressuring cities to make expensive bids for the Olympics. Private interests, such as construction companies and investment banks, know they won’t have to cover the excessively high costs associated with hosting so they commission and influence biased economic impact studies that pressure governments into spending a lot of money on bids. The winner’s curse is the tendency for a winning bid to exceed the value of the item being bid on in an auction with incomplete information. When host cities are bidding for the Olympics, they don’t have perfect information of how much revenue the Olympics will generate, as is proven by the wide disparity between the ex-ante and ex-post analyses discussed in part I. Thus for both of these reasons, the local organizing committee is likely to make an exuberantly large bid, resulting in a large financial loss from hosting the Olympics. This intuition is empirically verified. An econometric study examined the effects of hosting the Olympics on long-term growth by comparing Olympic host cities with host cities that were finalists for the Olympics, but were not selected. The study compared host cities with finalists in order to account for self-selection biases, since cities vying for an Olympic bid are likely all cities that are experiencing growth. The study’s regression analysis found “insignificant impacts for measures of population, real GDP per capita, and trade openness” (Billings and Holladay). This result provides evidence for the idea that cities “bid away” the potential economic benefits of hosting an Olympics by spending excessively.
After a city has won the bid to host the Olympics, the next round of costs come during the preparation phase. The scale of the Olympics is immense, as over ten thousand athletes compete in over 300 events. A successful host city requires highly specialized athletic facilities to accommodate each sport, as well as improved transportation infrastructure, and housing for spectators and athletes. In an effort to impress the rest of the world and potentially seize the future tourism market discussed in part I, cities construct extravagant and architecturally complex stadiums. A famous example was the Bird’s nest stadium in Beijing, which cost $480 billion to build (NPR). Cities attempt to justify these massive stadium expenditures by framing them as investments and claiming that they can be used in perpetuity for sporting events beyond the Olympics. History tells a different story, as these stadiums end up as economic burdens rather than boons. Sydney’s Olympic stadium now costs $30 million per year to maintain. The Bird’s Nest now costs $11 million per year to maintain and is widely unused, aside from visitors who pay an $8 fee to walk inside (NPR). Greece’s stadiums in Athens are in an even worse state, as many have been completely abandoned, and are now derelict or inhabited by transient homeless people. The IOC also requires the host city to have a minimum of 40,000 hotel rooms available for spectators as well as housing for 15,000 Olympic athletes and officials (CFR). Additionally, the IOC brand protection policy requires the host city to control all billboards from one month before the Olympics through one week after the Olympics ends. This costs the city a huge amount of advertising revenue, and forces them to compensate private billboard owners in addition to the costs of putting up and taking down promo material for the Olympics (Zimbalist).
Although infrastructure is claimed as a long-term benefit from hosting the Olympics, I doubt this is the case. If cities wanted to enact better infrastructure, then they could do so without the additional billions of dollars’ worth of bad investments associated with the Olympics. Cities would also have more flexibility surrounding their infrastructure plan, as they wouldn’t be hampered by IOC requirements or time constraints. Often, cities overspend on construction leading up to the Olympics because they have strict deadlines that they must meet, but if infrastructure investments were made outside of the Olympics, no such time pressures would exist. The fact that cities should invest in infrastructure is not a convincing argument that the Olympics are necessary for infrastructure investment. The only way this argument could be feasible would be if the Olympics were the only vehicle forceful enough to surpass political gridlock that usually hampers infrastructure investment. Finally, the opportunity costs of infrastructure investment must be considered. If a city is hosting an Olympics, then the government is probably reallocating vast resources from other areas towards infrastructure. If the government initially thought that those resources would generate greater utility from being invested elsewhere, then it is suspect that reallocating those resources is the correct economic decision.
A recurring issue with the preparatory costs leading up to the Olympics is the issue of cost overruns, where cities end up spending far more than was planned in the budget. An overrun has occurred in every Olympics since 1960, with the average overrun being 252% after adjusting for inflation (Stewart and Flyvbjerg). These overruns can be traced back to the principal-agent problem of promoters deceiving the government by lowballing cost estimates and estimating costs for a bare-bones Olympics without all the bells and whistles that will be added later. There’s also an issue regarding input prices for construction. Because of a sharply increased demand in concentrated areas such as the markets engineers, construction materials, and other preparatory costs, input prices increase, and construction costs become higher than was anticipated.
The final bucket of costs that must be analyzed is that of operating costs, which comprise all expenses during the Olympic Games themselves. The Olympics always begin with an opening ceremonies, which is a chance for countries to show off national pride and signal a positive image to the rest of the world, hopefully encouraging future tourists to visit. China is purported to have spent $343 million on their opening ceremonies alone in 2008 (Feblowitz). A second large aspect of operating costs are security. Security costs have sharply risen since 9/11. The 2000 Sydney Olympics spent $250 million on security, but following 9/11 the 2004 Athens Olympics was forced to spend $1.6 billion on security, which is a number that all following cities have spent close to (Baade and Matheson 204). Other operating costs include food, transportation for athletes, maintenance of venues, sanitation, utilities, and many more logistical concerns. There are also huge amounts of tax revenue missed out on during the Games because host cities are not allowed to tax athletes, sponsors, or IOC personnel (Zimbalist).
Part III: Recommendations
As the Olympics are currently structured, it is extremely difficult for host cities to avoid losing substantial amounts of money. Lessons can be gained from the only profitable Olympics in recent memory: the 1984 Olympics in Los Angeles. Experts believe that a major reason for Los Angeles’ profitability was the great amount of existing infrastructure that the city was able to use for the Olympics. If in the future, cities could host the Olympics without having to invest substantial amounts of money in new stadiums or infrastructure, then hosting would be much more economically viable. My proposal is for the IOC to select three locations that have either successfully hosted the Olympics in the past, or for other reasons have much of the necessary infrastructure to host the Olympics. These locations would each host the Olympics once every 12 years on a rotating basis. This proposal would solve a few major concerns with the current system. First, it would make investments in sports venues more worthwhile because they would have a guaranteed use in the future. Second, the preparatory costs of hosting the Olympics would be greatly diminished, because hosts would each have the remaining infrastructure in place from previous Olympic Games. Third and most importantly, the inefficient bidding system would be eliminated. After thorough research about the economics of the Olympics, I strongly believe that most of the financial problems stem from the bidding system. Due to the principal agent-problem, competition with other cities, and the winner’s curse, cities are spending far more than is necessary to successfully host the Olympics. Under my proposed system, each of these problems would be alleviated. First, the problem of imperfect information would be improved because the same cities will always host the Olympics, so they will have data from previous games about how much revenue they can realistically expect to generate from hosting. Second, the cities would be guaranteed a bid for set years, so they wouldn’t need to try to outspend competitors.
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