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To Host or Not to Host? The Macroeconomic Effects of the Olympic Games

With the grand opening ceremony being held in Beijing on Feb 4, the 2022 Winter Olympics has officially started. Having already successfully hosted the Summer Olympics in 2008, Beijing has become the first-ever dual-Olympic city globally. While public focus turns into the competition among athletes, economists are curious and skeptical of the economic benefits of hosting an Olympics. The table below shows the rough costs of hosting recent Olympic Games from Baade and Matheson (2016). We can see the cost is sizable and skyrocketed over time. Baade and Matheson also summarize the direct comparisons of revenues and hosting costs, though the results are not appealing. For example, in the case of the London and Vancouver Games, the direct revenues from both Olympic Games represent only a small fraction, around one in five, of the total costs of hosting the event.

Costs of Hosting Recent Olympic Games

Source: Baade and Matheson (2016)

Having said that, the battle in selecting a hosting city for an Olympic Game is still fierce, and bidding cities are desperate to show the International Olympic Committee (IOC) their desires and determinations for wanting to host. The next table reports the complete lists of hosts and unsuccessful candidate cities for post-war summer Olympic Games to give you a sense of perspective.

Hosts and Unsuccessful Candidate’s Cities for Post-war Summer Olympic Games

Source: Rose and Spiegel (2015)

Arguably, we can split the total macroeconomic effects of the Olympic Games into three parts: the ex-ante effects, the hosting year effect, and the ex-post effects. While the last two effects are observed and easy to quantify, the first type of effect is unobserved and attributed to a “news” effect class that is hard to measure and not exploited in most studies. To tackle this difficulty, Brückner and Pappa use the unique timeline of the bidding process on Olympic Games to identify the ex-ante effects. Specifically, they notice that the average time from bidding to hosting spans ten years. The bidding process begins about ten to eight years before the actual hosting. The final winner is announced around seven years before the actual hosting. Thus, if it exists, the ex-ante macroeconomic effects of the Olympic Games from bidding signals should play a role about ten to eight years before hosting the event. Similarly, the winning signal starts to work from seven years before the organization for the hosting countries. 

To test their ideas, Brückner and Pappa employ a large sample covering a panel of 188 countries spanning the periods 1950-2009. They propose to use a static panel model containing both the leads and lags of the bidding/hosting indicator to measure the impacts. Specifically, the leads are used to quantify the ex-ante effects as they capture the impact of future bidding/hosting announcements on the current macroeconomic variables (e.g., GDP growth, investment, consumption, etc.). Similarly, lags and the current bidding/hosting status capture the actual year and ex-post effects, respectively.

As expected, they find output growth, investment, and consumer consumption significantly increase during the bidding periods, especially about nine to seven years before the actual hosting of the Games. Interestingly, investment responds first, while output and private consumption react with a one-year lag relative to investment. The bidding cities usually use the three-year window to improve their infrastructures to gesture toward the IOC. As such, the investment goes up and then transmits to other sectors. After selecting the winner, they also find a three year long sizable and positive ex-ante effect on the hosting countries’ output, investment, and consumption growth. By comparison, the hosting countries increase GDP growth by three times more than those countries that were bidding but unsuccessfully for the Games. The peak effect occurs around four years before hosting. Brückner and Pappa claim that the results match the 2-4-1 investment plan. Hosting countries tend to use two years for planning (seven to six years before the actual hosting), four years for construction (five to two years before the actual hosting), and the last one year for testing (one year before the actual hosting). Brückner and Pappa also evaluate the ex-post effects for bidding and hosting countries. Yet, the results are insignificant for both groups.

Cumulative Effects on Output for Hosting Countries

Source: Brückner and Pappa (2015)

Favorably, the sum-up cumulative effect is significantly positive on hosting countries. The above figure shows the Olympic Games’ sum-up effects on output for hosting countries. We can observe a persistent, long-lasting legacy effect. In contrast, the cumulative impact is virtually no effect for the bidding but unsuccessful countries, as shown in the figure below. Having had a short-run ex-ante effect, the positive momentum rapidly vanishes and becomes insignificant in the long run.

Cumulative Effects on Output for Bidding Countries

Source: Brückner and Pappa (2015)

Indeed, Brückner and Pappa confirm the long-run benefits or “Olympic legacy” on hosting countries. We should also realize the size can be even more prominent as their work cannot capture benefits from all dimensions, such as intangible benefits like the city’s reputation or civic pride. Of course, their results do not simply imply they recommend all countries to bid for hosting. When considering hosting a significant event like the Olympic Game, countries should not be hasty. Otherwise, one may bite off more than one can chew. However, for a ready country that still hesitates over trivial issues, why not submit the bidding proposal. The Olympic Game can be a strong shot.

Chaoyi Chen


References:

Baade, R. A., & Matheson, V. A. (2016). Going for the gold: The economics of the Olympics. Journal of Economic Perspectives, 30(2), 201–218.

Brückner, M., & Pappa, E. (2015). News shocks in the data: Olympic games and their macroeconomic effects. Journal of Money, Credit and Banking, 47(7), 1339–1367.

Rose, A. K., & Spiegel, M. M. (2011). The Olympic Effect. The Economic Journal, 121(553), 652–677.


Főoldali kép forrása: pixabay.com

The post To Host or Not to Host? The Macroeconomic Effects of the Olympic Games appeared first on Economania blog.

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