The Economic Consequences of Publicly Financing Stadiums

It’s February, which means it’s nearly time for the holiest day of the American athletic year: Super Bowl Sunday. There are any number of critiques we could bring to bear about the game itself, including the shockingly small proportion of real game time relative to the event’s total duration, or the outsize ad revenues generated by a sport that is increasingly associated with concussions and CTE. However, rather than concentrating on the game itself, today we’ll explore the venues where football and sports in general are played: the stadiums.

Stadiums are frequently financed with public dollars, including NRG Stadium in Houston where this year’s contest will be hosted. In the 1990s and 2000s, $12 billion in public money were spent on over 100 stadiums. This may seem strange to those unaffiliated with the topic, why should the public subsidize an already extremely profitable industry like professional sports? In most public financing scenarios, the government intervenes because a market failure exists that prevents a good that should be produced, from coming to market. Let’s first walk through the most common market failures and see if they apply to stadium financing.

Market Failure 1: Uninternalized Externalities

An externality is a positive or negative effect associated with production or consumption of a good, that is not wholly captured by the producer or consumer. For instance, a positive consumption externality would be consumption of a vaccine, because the vaccinated person benefits, but so too do those around him or her as they are less likely to contract a communicable disease. Similarly, a positive production externality is education, where not only does the educated person benefit, but society as a whole benefits from that person’s making more informed decisions as a result of his or her education. Therefore, the government has a reason to subsidize educational institutions and encourage people to get vaccinated.

Is there a positive externality in the case of professional sports stadiums? Not really. All benefits accrue to the consumers (fans) and producers (athletes and the league) and go no further. Additionally, cities need not actually have a professional sports team in their municipality for viewers to enjoy the experience. Cities can actually free ride off of teams in their region without having to bear the costs of hosting the team. For example, the New England Patriots play in Foxborough Massachusetts, but have fans in the greater New England area including Connecticut, New Hampshire, and Maine.

Market Failure 2: Information Asymmetries

Information asymmetries accrue when either the buyer or seller is not aware of the true value of the good. This prevents efficient exchanges where, if the parties had full information, they would complete the transaction, but with limited information the transaction fails. The most famous example of an information asymmetry comes from (Georgetown Professor) George Akerlof’s Market for Lemons, in which buyers of used cars are hesitant to purchase because they cannot verify the quality of the used car they are purchasing.

However, it’s difficult to see how an information asymmetry exists in the case of professional sports stadiums. Buyers and sellers know the value of the land, the jobs associated with the stadium, and have a reasonable idea of what the team’s value will bring to the city. There is nothing preventing a private bank or other lender from performing the cost-benefit-analysis themselves, and deciding whether or not a stadium is a good investment.

Market Failure 3: Public Goods

The final common market failure comes to us in the form of public goods. Public goods are defined as goods that are non-excludable (I cannot prevent you from consuming the good), and non-exhaustible (my consumption of the good does not limit your consumption of it). The most common example of a public good is national defense, where the military protects all inhabitants of a country, and it is difficult to see how one person’s safety impinges on another’s. Because of their open-access nature, people free ride off of whoever decides to provide them and they end up being under produced.

In the case of professional sports stadiums, we may actually have found a public good. As noted before, states like Maine can free ride off Massachusetts, even though the Patriots play out of state. This is because it is nearly impossible for Massachusetts to prevent inhabitants of Maine from consuming Patriots’ football, and Maine’s consumption of football does not limit anyone else’s.

So perhaps there is a market failure! Next question: is the payoff of providing this good worth it, that is, do cities who publicly finance stadiums see a positive return on investment, indicating stadiums are being under produced?

The Literature Says…

 …Not so much. Let’s briefly walk through the arguments as to why stadiums bring their host cities increased wealth.

1. Stadiums create jobs and wealthy athletes will seek to spend their money in the host city.

In reality this does not bear itself out. First, the majority of jobs associated with workers who staff a stadium and a professional sports team are temporary, and low-skill jobs. Stadium workers only work when there are events at the stadium (in the case of football eight times a year for most teams), and low-skill jobs tend to pay below median wages. Additionally, many athletes are not permanent residents of the cities they play for, and therefore do not spend their paychecks in those cities or pay taxes to them. Lastly, this argument in favor of stadiums as job creators, only functions insofar as one assumes nothing better can be done with the land and resources where the stadium will be built. Perhaps a factory or office park would be a more efficient use of capital in terms of bringing jobs to the city.

2. Fans of the team will spend their money on or around the the stadium.

However, those entertainment dollars would have been spent anyway, and don’t represent an added boon to the local economy. Either that, or they would have been spent on vendors in a different city, and therefore the stadium only causes a wealth transfer from one city to another.

So it doesn’t seem like there’s a justifiable financial reason for cities to devote public dollars to financing stadiums. In fact, it seems like an economic loss in most cases, with contingent valuation methods of local fans demonstrating they wouldn’t pay the required amount to keep the team local. But what if we wanted to expand the analysis and look at what the social impacts are of putting a major event center in the middle of a city?

But what else are cities subsidizing when they build a stadium? 

To explore this issue, we conduct a quasi-experiment on an area with a recently built stadium. This led us to Minneapolis Minnesota, where the Minnesota Vikings play. Minneapolis’ situation is unique and well suited to our experiment’s needs, because the Vikings played in the Metrodome until it was torn down in 2014 and the team moved across the river, to TCF Stadium. Then, once the new U.S. Bank Stadium was completed on top of the old Metrodome site, the team returned to its original location for the 2016 stadium.

We set out to answer the question of, whether building a large event center such as a stadium causes an uptick in crime in the surrounding area. The two Vikings stadiums are only several miles apart, and therefore the surrounding neighborhoods are unlikely to be significantly demographically different from one another. This allows us to rule out confounding factors that might better explain the true cause in any crime statistics observed from year to year.

Using the excellent geospatial data repository from the City of Minneapolis Open-Data project, we visualized U.S. Bank Stadium (to the west), and TCF Stadium (to the east). The two stadiums are approximately three miles apart, and are separated by the natural barrier of the Mississippi River, so crimes committed near one stadium are unlikely to affect crimes committed near the other. We then construct a network analysis around both stadiums, showing how far someone could go if they traveled 1.5 miles by road, rather than a straight line, as the crow flies approach. This is important because it offers a more realistic projection of which crimes committed nearby could be reasonably expected to be associated with the stadium.

Next, we visualize all crimes committed within the city between 2010 and 2016, with different years’ crimes coded as differently colored dots. We downloaded the crime data points that intersected our network analysis, cleaned and transformed it, and ran a regression analysis. Using a simple linear regression, we’re able to isolate specific factors and how they contributed to changes in crime rates.

The nature of our quasi-experiment allows us to filter our most statistical noise that might correlate with higher or lower crime rates, such as the state of the economy, because both locations are part of the same city and would be equally affected by any statistical noise. However, our experiment only controls for location, not time, so we include each year in our regression models to account for the possibility that one year was just particularly crime ridden, regardless of where the Vikings were playing.

In model 1, we look at crime around TCF stadium, including each year in the model except 2013, the year right before the Vikings moved from the Metrodome and to TCF. As you can see, the year variables don’t tell us much. However, when we also examine days of the week, we see that Sundays were correlated with higher crime rates than any other day of the week except Thursday. Our model then suggests that crime rates went up in the vicinity of TCF on game days.

Our model for U.S. Bank Stadium is less conclusive. We control for the same range of factors, but find crime rates fell slightly on game days around U.S. Bank. However, we would note that this data is harder to parse through for two reasons. First, U.S. Bank is in a downtown area, and is less geographically remote than TCF Stadium, meaning it’s harder to isolate crimes that occur around the stadium versus the downtown area in general. Second, U.S. Bank Stadium sits on the site of the old Metrodome, meaning it’s harder to separate when the impacts of the Metrodome, versus the construction, versus the new stadium separate.

Ultimately, we realize we’re playing the ultimate in buzzkills, but there does not appear to be a compelling reason finance stadiums with public funds, and there may even be a detriment to doing so. Admittedly, restricting construction to private funds would confine stadiums to major metropolitan areas with taxable economies high enough to pay back investors, but is that really so harmful? California has already shown it’s possible by forcing the San Francisco 49ers to move to Santa Clara, rather than using public funds from San Francisco to build a new stadium. Though both authors bemoan the state of their team’s 2-14 record, at least they aren’t subsidizing their own misery.

Piotr Le

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