Economist's Notebook: Sports Teams and Social Value

The Wall Street Journal has a nice article on the attempt to use contingent valuation (CV) to assess what the Minnesota Vikings are 'worth' to the people of Minnesota. The answer? $700 million. The problem is, of course, that what we answer to a hypothetical question like "how much would you be willing to pay to keep the Vikings in Minnesota?" may have little to do with how we would actually behave when it became time to pony up. One of the big problems is the free rider problem whereby you don't pay anything assuming that the fat cats will pay a lot. Environmental economists have, for many years, used CV methods to try and place a value on a forest, stream, or other environmental attribute (e.g. clean air). But this is the first time I have seen it for sports which surprises me. I would think that folks like Merritt Paulson would do something like this to try and convince city leaders that what he has to offer people care about.

Here are some excerpts from Conor Dougherty's article:

MINNEAPOLIS—Christopher Slinde, a lifetime Minnesota Vikings fan who has endured decades of heartbreak and lots of overpriced beer in supporting his team, believes Vikings fandom is priceless. According to economists, it's worth $530.65.

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As fans pack stadiums and couches to watch the National Football League's divisional playoffs this weekend, they care about victory. Economists are tackling a more abstract challenge: putting a price on the emotional benefits of having a pro sports team in town.

The worth of fandom may seem theoretical, or even silly. But it's serious business for teams like the Vikings, who want Minnesotans to help them pay for an $870 million stadium to replace the Hubert H. Humphrey Metrodome in downtown Minneapolis. The Vikings' Metrodome lease runs out in 2011 and the team says it won't sign an extension without a deal for a new stadium.

The team hasn't explicitly said it will bolt without a deal. But it insists the Metrodome cannot support a modern NFL franchise. So, many fans are convinced that without a new stadium, the Vikings will take their quest for football greatness to a warmer state with no Nordic heritage.

Sports teams sell their facilities as economic-development projects that create jobs and generate tax revenue. But a slew of studies have shown that publicly subsidized stadiums—usually paid for by selling bonds and paying the cost and interest with tax revenue–rarely return the money governments put into them. Teams continue to argue, often successfully, that they are worthy of subsidies because they are a source of civic pride and purpose.

But what is that worth? Economists Aju Fenn and John Crooker tried to answer the question in a study published in July 2009 in the Southern Economic Journal.

The two used "contingent valuation methodology," which is a nerdy way of saying they surveyed people and used statistical models to turn the answers into an average price Minnesotans place on the Vikings.

The result: The Vikings' "welfare value" is $702,351,890— $530.65 for each of the roughly 1.32 million households in Minnesota.

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You couldn't touch that money. It's an abstract figure meant to catch everything from the joy of donning blond braids and Vikings horns to the feeling of pride that even nonfans get from living in a "major league" city. In the broadest sense, Mr. Crooker says, "welfare value" represents the worth Minnesotans place on having the Vikings in Minnesota.

It's tough putting a price on feelings, which is why some economists are skeptical of contingent value studies.

"It's not that this is capturing nothing, it's just that it's not legitimate to interpret people's answers as if folks were spending their own money," says Peter Diamond, an MIT economist. He co-authored a 1994 paper titled: "Contingent Valuation: Is Some Number Better Than No Number?"

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Survey questions were fine-tuned by the Metrodome experience. In the 2002 off-season (to minimize in-season emotions), Messrs. Fenn and Crooker mailed 1,400 surveys to households across Minnesota, capturing both fans and nonfans.

The study's figures were based on the mail surveys, which had 30 questions ranging from demographic information to how much time the person discussed the Vikings at home and at work. But the so-called welfare value was generated from a single yes or no question: Would you be willing to pay $X out of your own household budget for the next year to make a new stadium possible? There was one price on each survey (it ranged from $5 to $100).

Mr. Fenn cautions that the $702 million welfare value doesn't mean that helping the Vikings with a stadium would be the best use of the state's tax dollars.

"We're not suggesting that the state of Minnesota act a certain way, or that voters support [a new stadium], or not support it," he says. "We're just pointing out that the Vikings mean a lot to the average Minnesotan."

Also, here is a nice Q&A With Jerry Bell of the Minnesota Twins (who are building a new stadium).

Baseball and Portland: Winner-Take-All Markets and Demand

I came across an interesting post on the Portland Architecture Blog (where I indulge my fantasy life as an architect) which muses whether Portland has grown beyond the minor leagues. The idea, in essence, is that Portlanders are no longer in minor league sports because we have become a major league city even without the major league teams. It is an interesting notion but it made me think about another aspect of the economics of sports.

Winner-take-all markets are those in which extremely small differences in ability can lead to humongous differences in rewards (compensation). These markets are usually characterized by reproducibility of effort. Popular music is one classic example. It used to be that musicians had to preform live and necessarily to a limited audience. So a slightly more talented musician may draw a few more people in the audience, but the differences were small. With high fidelity recordings, suddenly the market was virtually unlimited and a slightly more talented musician could sell perhaps millions more than a slightly less talented one.

Modern sport shares this same aspect. Now that sports have become a global media phenomenon it shares the reproducibility aspect in that sports performances can be beamed into billions of households around the world. What this means is that small differences in ability - the difference between being a major league level player and a AAA player - may be very small, but the rewards that go to the slightly more talented player may be ten, one hundred, one thousand times greater than the rewards to the slightly less talented one.

This is all well-known now thanks to Bob Frank of Cornell's Business School who (to my knowledge) coined the term. But what I wonder is how this translates to the demand for the goods whose markets are characterized by this winner-take-all aspect. [Perhaps this has been studied, but I am not aware of such studies] I wonder if consumers take short-cuts in deciding how to value such a product, and the short cut is that they make the assumption that these markets are efficient and if players are getting one hundred times the salaries, the product they are producing must be around one hundred times better. So it may be that the quality of the baseball played by the Beavers is just a tiny bit below the Mariners, but people look at the outsize salaries MLB players make and assume that the quality of the Mariners must be a lot better.

Now, even if true, this is only one difference that matters for demand. The modern major league ballpark is a far cry from PGE and offers a host of amenities not just the baseball, or as the Portland Architecture Blog wonders, maybe demand is wrapped up in self-image. But the baseball played on the fields is really not that different. So I wonder how reflexive is demand to the winner-take-all aspect of the market for players...

By the way, if this is true, what does it mean for MLS, where typical players don't make that much more than their USL counterparts?

Soccer in Portland Redux

On Monday, The Oregonian had another article about the success of Major league Soccer in the US. And while the article was fine, by focusing on past and current demand I think it missed an essential aspect of investing in a business - expected future returns. MLS has made major strides in its short history: there is now a steady roster of teams, many new soccer-specific stadiums, more wealthy owners and an increasing talent pool. But these are only partly why franchise fees have gone from $10 to $40 million in a few short years. The fundamental trajectory of soccer, the world's most popular sport, in the world's biggest market is clear: up, up, up.


This is different than saying 'everyone else in the world loves soccer, so should the US,' this is about the fact that the soccer crazy world spends a lot of money following soccer and watches it rabidly. Top European soccer teams are as valuable as the biggest NFL and MLB clubs in America and English teams are falling over themselves to try and get a piece of the US market. So there are huge potential returns globally from the growth of the MLS. It is probably decades away, but that does not stop current valuations from reflecting the potential future returns. There is a reason, on other words, that Merritt Paulson is going to put up the 40 million himself - he does not want to share the potentially huge payday if franchise fees continue appreciating they way they have been recently.


Even domestically, there are many reasons to expect that attendance and viewership will keep increasing. The US population is increasingly representative of cultures where soccer is the main sport. The growth in soccer participation among youth players has been explosive whcih not only increases the potential domestic talent pool, but creates generations of soccer-savvy fans.


As for Portland, the proven support for professional soccer and a stadium that could become the best soccer stadium in the country make it a pretty safe bet for the city, one would think.


In short, the future returns from a professional soccer club in America are potentially huge. Merritt Paulson is no idiot. He is not about to spend $40 million on a suckers bet.

Major League Soccer in Portland

The Oregonian reports today on Merritt Paulson's request that the city borrow $75 million on the bond market to pay for renovations to PGE Park and to build a new Beavers stadium in Lents so that he can buy an MLS franchise and bring it to Portland. The obvious economic question is: is this a good idea for the City of Portland?

[A quick disclaimer, I have played soccer all my life, am a devoted fan of the sport (and pretty good judge of teams - see my amazingly insightful prediction of Spanish success in the European Championship in June) and personally would welcome an MLS team in Portland.]

There has been quite a bit of economic research on the effects of new stadia and new teams and the results are in general agreement that there is little measurable net positive impact of teams and stadia to overall investment or economic activity. This research has done a lot to change the public debate about such projects, ten years ago, you would probably have heard about stadia being economic engines driving the city forward. Now, there is little in the way of overblown promises about being a boon to overall economic activity and, I think, Paulson and the City of Portland are to be commended in keeping the rhetoric subdued: with reasonable patronage, the teams could service the debt. Portland would carry the risk and the reward is an MLS team and a nicer place to watch baseball.

Though overall investment and economic activity are not seen to be increased by stadia construction, there is some agreement that such projects can serve as focal points for investment. In other words they can attract investment to an area that might not otherwise see it. This comes form the fact that there are positive externalities that comes from gathering people together in new or improved stadia: you bring custom to areas that would not normally see it. This custom is not totally captured by the teams themselves and thus there is a positive benefit that can be captured by those interested in opening up shops, restaurants, bars and even new housing.

Anecdotally, Denver is a good example of this. Before Coors field, Lower Downtown in Denver was a run-down warehouse district, with the new ball park it is now a thriving entertainment and shopping district and many, many new apartment projects have sprung up around the park advertising their proximity to the park and the district. [A caveat: we will never know the counter-factual - would LoDo have had the same renaissance without the stadium? This problem plagues economic research and we do the best we can to try and deal with it, but all of this evidence on the impact of stadiums is, at best, strongly suggestive.]

So, while there does not seem to be evidence of overall increases in economic activity (e.g., we should not expect the Portland tax revenue to increase), it is reasonable to talk about creating a focal point for local investment. Whether the small minor-league park envisioned for Lents is enough to drive enough investment to really create a change in the area is an open question, but I suspect so (it will also, hopefully, be small enough to avoid the other side of the externality: noise, trash and traffic). Open to debate, however, is whether there is another way to create a self-funded way to create a focal point (e.g., BIDs).

So is it a good idea? Well, people derive happiness from having sports and cultural attractions (we often see survey evidence of such attractions being a prime reason people choose to live where they do) but it is a very hard thing to measure. The point is that the benefits of having sports teams is more than just the measurable economic activity that they create, but the utility people derive from their presence. Whether it is worth the risk to the City of Portland to finance the stadium projects ultimately depends on how much these sporting attractions matter to Portland residents.

The Oregonian also published today an Op-Ed piece that argued that the City should not invest in stadia but rather green jobs. In it the author points out, rightly, that there is no evidence of overall net increases in economic activity or tax revenues from such investments, but wrongly suggests that we should, therefore, expect no local investment in Lents. These two things are not the same. What is worse is that the author presents a false dichotomy: invest the $75 million in energy improvements for housing. I have nothing against such a proposal in principle - but it has very little to do with the sports stadium proposal. The $75 million for stadia is intended to be self-funded, the green housing proposal is not self-funded. The fact that the city would borrow $75 million could impact their ability to raise more funds as cheaply in the future, but should not prevent them from investing in green housing or other such proposals in any significant way.