Category Archives: Sport

Football stadiums and economics

With the start of the EPL this weekend I thought it appropriate to look at something related to football. Teams in the EPL and other domestic leagues often look for funding from the government to build stadiums with the rationale that the investment will attract consumers and businesses to the local area. This suggests that a multiplier effect would be at work and the benefits to the area go beyond that of the football field.

The size of the multiplier is influenced by how much of extra income is spent on domestically produced products. The more that is passed on in the circular flow, the larger will be the multiplier. This means that the size of the multiplier varies inversely with the tendency for extra income to be withdrawn from the circular flow – the marginal propensity to withdraw. It is calculated by 1/marginal propensity to withdraw. In the case of a two sector economy, this is I divided by the marginal propensity to save (mps). For example, if people save $20 out of an increase in income of $100, the mps will be 0.2 and the multiplier will be 1/0.2 = 5.

Cities with new stadiums initially create jobs and growth but in the long-term there is little economic benefit. Why?

  1. For all their cultural significance, sports tams are not very big businesses and so their overall impact is small in most cities of any size.
  2. If local residents spend more at the stadium they are likely to reduce spending elsewhere which will impact on local businesses.
  3. A stadium may attract more visitors from outside the area who inject money into the local economy, but the multiplier effect is likely to be small because many of the services they consume will actually come from outside the area – e.g. food and beverages may be shipped in from elsewhere.

If you look at previous World Cups or European Championships there tends to be the same issues as mentioned above

The 2010 World Cup in South Africa saw Soccer City, the largest sports venue in Africa, undergo a £300 million renovation which costs £250,000 a month to maintain. It is the stadium for the Kaizer Chiefs and Orlando Pirates but is rarely full and has struggles to make revenue from other sources. See below:

Brazil spent about $3 billion building 12 new or heavily refurbished stadiums for the 2014 World Cup. Officials justified the expense by saying that the stadiums would generate revenue for years to come with Brazilian football premier league games and rock concerts but most stadiums are failing to generate any revenue. The most expensive stadium in Brasilia – 72,000 seater and a $900 million venue – is used a bus parking lot. A big issue here was that there was no major professional football team in the city so therefore limited crowds would be present. Although the organisers rationale was to improve facilities around the country there are white elephants evident – in some locations teams cannot afford the rental so will play at much smaller venues. A $600m stadium in Manaus was used for 4 World Cup games but is now empty which is not surprising as the city itself has a lower division football team who don’t have the finances. What people forget is that, although the stadiums might look good and are used to host the biggest sporting event in the world, a large number of people are displaced and neighbourhoods disestablished. But organisers say that it will add to the well-being of the population especially if the host side wins – however this has not been the case for Brazil – in fact as we know it turned out to be a bit of a trashing in the semi-final against Germany. It will be interesting to see the use of stadiums in Russia after the World Cup just gone but one cannot doubt that the morale of the Russian people was significantly boosted by their teams performance.

World Cup – the economics of faking an injury.

As the World Cup enters the quarter final stage we have seen the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing” . I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

 

 

Wages in the English Premier League – Demand-Pull Inflation

You are no doubt are well aware of the staggering wages that the English Premier League player receive especially when you consider other occupations.

What ultimately the salary explosion has been driven by the huge amounts of money that is now at the disposable of some of the top clubs. In economics this refers to the concept of demand-pull inflation where the supply has not kept apace with the demand for world-class players. Below is graph showing both demand-pull and cost-push.

Aussie Cricketers, Sandpaper and Game Theory

You will no doubt have heard of the ball tampering episode at the third cricket test in Cape Town between South Africa and Australia. Australian cricketer Cameron Bancroft was caught by a TV camera roughening up the ball with some yellow sandpaper that was kept in his pocket. He was seen later getting rid of the sandpaper down his trousers so that when the umpires asked him about he produced a sunglasses bag. Later on that day at the post play press conference Australian captain Steve Smith came clean with what was a premeditated plan to roughen one side of the ball and so that the Australian bowlers could take advantage of reverse swing. Tampering with the ball is illegal in cricket and the ICC (cricket’s governing body) banned Steve Smith for one game

I have blogged previously on game theory in sport looking at – Penalty Kicks in Football and How doping impacts Athletes, Organisers and Supporters. As prize money and sponsorship deals get bigger, so do the incentives for coaches and players to find ingenious ways to cheat. So how would the sandpaper incident at the third cricket test in Cape Town lend itself to game theory?

Game theory deals with differences of opinion between groups who know each other’s inclination but not their genuine objective or choice. It then concludes the optimum course of action for any rational player. In this scenario the parties involved are the competing cricketers and, although both are better off if neither tampers with the ball, they cannot trust each other so both engage in ball tampering – Prisoners Dilemma. If you introduce an authoritative figure – the International Cricket Council (ICC) – to observe cricketers with many camera angles, the fear of getting caught should ensure that no ball tampering takes place. This is referred to as the inspection game. However as you know it wasn’t the ICC who took strong action over the video footage but Cricket Australia.

Another party that is crucial to cricket is sponsors and the spectators. Their critical role is the potential withdrawal of support which could see the cricket’s demise. Wealth-management company Magellan has terminated its three-year sponsorship agreement with Cricket Australia in response to the ball-tampering scandal worth around AUS$20 million.

A withdrawal of one of these three parties can trigger the withdrawal of the other two. Cricket cannot survive without sponsors, withdrawal of the media restricts the access to the customers, and finally cricket is only attractive for sponsors as long as there are customers. Therefore the strategies of the three parties looks like this:

Cricketers – Ball tamper or Don’t ball tamper (B D)
ICC – Video or No Video (V N)
Sponsors / Spectators – Stay or Leave (S L)

The assumptions are as follows:

Cricketers

B-N-S > D-N-S = cricketers prefer to ball tamper if not videoed.
D-V-S > B-V-L = cricketer prefer not to ball tamper and be videoed = customers stay, over being ball tampering and videoed = customers leave (assuming that customers don’t like ball tampering scandals)

Organisers

B-N-S > D-V-L = a scandal combined with a loss of customers is worse for organisers than undetected video where customers stay.
D-V-S > D-N-L = videoing and non ball tampering actions with customer support is better for the organisers than not videoing other cricketers when customers leave.

Sponsors / Spectators
B-V-L > B-V-S = customers prefer to withdraw support after a scandal
B-N-S > B-N-L = customers prefer to stay if there is no scandal.
D-V-S > D-T-L = customers prefer to stay if there is no scandal.
D-N-S > D-N-L = customers prefer to stay if there is no scandal.

Ball tampering & Video = Scandal
Ball tampering & No Video, Don’t ball tamper & Video, Don’t ball tamper & No Video = No scandal

Final thought
The vast majority of authorities in today’s sports events would state that their regimes to combat cheating are very stringent. However the likelihood of human deceitfulness is very realistic and in some cases it’s not those that tamper with the cricket ball who are the real cheats but those who have generated an environment where players would be foolish not to.

Volvo Ocean Race and the Multiplier Effect.

I am quite an avid watcher of the Volvo Ocean Race with the daily race updates and the excellent graphics on their website – currently they are in Auckland before setting sail for Itajaí in Brazil. Most days they have news on the current positions of the yachts and who has made gains and losses in the last 24 hours. A recent race update dealt with the economic impact that the race has had on the Spanish economy and it just happens that I am covering the multiplier with my A2 Economics class.

The Multiplier Explained

Consider a $300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then $180m will be added to the incomes of others. At this point, total income has grown by ($300m + (0.6 x $300m). The sum will continue to increase as the producers of the additional goods and services realise an increase in their incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be ($300m + (0.6 x $300m) + (0.6 x $180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC)
You can also use the following formula which represents a four sector economy
1 ÷ MPS+MRT+MPM

Source: CIE Revision Guide by Susan Grant

Impact of Volvo Ocean Race on Spanish Economy

PriceWaterhouseCoopers (PwC) conducted a study measuring the impact of the Volvo Ocean Race on the Region of Valencia and Spain. Some their findings are:

  • The impact in the Region of Valencia has grown to 68.6 million euros in GDP and 1,270 full-time equivalent jobs.
  • Hotels, restaurants and local business were the sectors to benefit the most.
  • Alicante received 345,602 visitors from October 11 to 22, 2017, (10.3% more than in 2014-15 and 17.6% more than in 2011-12).
  • The Volvo Ocean Race had a significant positive effect on national tax revenue, adding more than 41 million euros.
  • The media value directly linked to coverage mentioning the Alicante brand over the period of the race start exceeds 36 million euros.

The Volvo Ocean Race 2017-18 has added 96.2 million euros to the Spanish Gross Domestic Product (GDP), an increase of 7.6% over the 2014-15 edition. The race also generated the equivalent of 1,700 full time jobs in Spain, according to an economic impact study delivered by PriceWaterhouseCoopers (PwC) measuring the impact of the Volvo Ocean Race on the Region of Valencia and Spain.

The impact in the Region of Valencia grew to 68.6 million euros of GDP, a 3.3% increase on the 2014-15 edition. The sectors of activity that benefited the most were local businesses and restaurants, each by more than 10 million euros. In terms of employment, the equivalent of 1,270 full-time jobs were generated, a figure similar to the last edition.

The PwC study estimates a positive effect on tax collection in Spain of more than 41 million euros as a result of an increase in economic activity and employment generated by the Volvo Ocean Race 2017-18.

The actual value of the multiplier is not mentioned in the report but from all accounts the Volvo Ocean Race has had a very positive impact on Valencia.

America’s Cup and Cost Benefit Analysis

There has been a lot talk about the impact of the America’s Cup and the economic impact it will have on the Auckland economy. Consultancies have suggested that the Cup could generate up to $1billion injected into the NZ economy, thousands of jobs created, a return of more than seven dollars on every dollar invested in new wharf facilities. These figures have come under criticism by Tim Hazeldene in the NZ Herald.

As for the value-added injection and the jobs created: to a first-order approximation, the net number of new jobs created in Auckland, with its already stretched construction and tourism industries, will be about zero. The workers needed will be bid away from other jobs, or imported as new immigrants. As a result, there will be no significant real output increases, the extra spending will be soaked up in higher prices.

Higher prices are harmful for domestic New Zealand customers and travellers but beneficial to the bottom lines of New Zealand and foreign owned businesses. It’s a trade-off. My expectation is that, overall, there will be net economic benefits from holding the Cup in Auckland but that they will be quite small — below the costs to which national and local government are being asked to contribute.

The economic impact is based a lot on the multiplier effect but the use of cost benefit analysis also considers those external costs and benefits which are not easily convertible into a monetary value.

Evaluation of CBA
It is clearly more efficient for public spending to be subject to rigorous analysis, rather than based on the whims of politicians. However, there are a number of criticisms of CBA, including:

1. It is often very costly to undertake, though usually this forms a very small proportion of total project spending.
2. Assessing the monetary value of external costs and benefits is often very difficult. What precisely is the value of the congestion that would be reduced if a new bi-pass were built around a busy town? How much extra tourist revenue will actually be gained from a new airport? How long will the building be used as a venue, as in the case of the Viaduct area in Auckland for the 2020 America’s Cup. One solution to this problem is shadow pricing, where analysts attempt to place a value on the costs and benefits of a decision or a project where an actual market price does not exist.
3. Changing circumstances can make initial projections appear grossly inaccurate. The Wembley Stadium project in London went considerably over-budget, and the majority Olympic Games are far more costly than originally estimated. For instance the Montreal Olympics in 1976 was eventually paid off in December 2006. Higher interest and inflation rates, and falling exchange rates can all dramatically affect costs.
4. Actual costs can also rise above planned costs as a result of moral hazard, where project managers go over budget because they expect that those who fund the project will make extra funds available, providing an insurance against their over-spending.
5. Ultimately, decisions to go ahead with projects are only guided by CBA, leaving politicians to make the final decision. Politicians are free, of course, to ignore the results of an appraisal.

If you have read the book Circus Maximus you will no doubt be aware that most big sporting events run over budget and in some cases don’t generate the benefits until well after the event if at all. So just because an event runs over budget is that enough to say that we shouldn’t go ahead with the event. There are a great many other benefits of hosting an event like the Americas Cup which are not measured by GDP. The sense of community and wellbeing that comes from New Zealanders performance whether it be in rugby or at the Olympics. It tends to bring people together feel a sense of belonging which has external benefits. More recently the NZ government have introduced the Treasury Living Standards Framework – LSF

The Living Standards Framework

The Treasury Living Standards Framework draws on international work to supplement income based on measures of well being. So as well as GDP – which tends to be the standard indicator as to the health of an economy – other indicators such as:

Natural Capital – land, soil, water, plants and animals
Human Capital – skills, knowledge and physical and mental health
Social Capital – Trust, rule of law, cultural identity
Financial and Physical Capital – Houses, roads, buildings, hospitals etc.

So how will the above be impacted by the America’s Cup in Auckland?

What are the highest paid sports leagues?

NBA basketball has the highest average salary of any sports league followed by IPL cricket with baseball coming in third. Over half of the highest paid leagues were football with the EPL and the Bundesliga being above US$2 million. It is interesting that La Liga is third within the Football category even though a Spanish team has won the Champions League 5 times in the last 7 years.

In cricket the Twenty20 format has proved to be very popular with television viewers and gets very good attendances most notably in the IPL (India), Big Bash (Australia) and T20 Blast (England). In September this year IPL signed a five year contract worth US$2.55bn (US$510m per year) for broadcast and digital rights with Star India – a TV network owned by 21st Century Fox. The IPL competition involves just 60 matches which equates to US$8.5m per game which is 400% higher than the NBA per game and 66% greater per game than that of the EPL.

Cricket in the USA
Although cricket is globally very popular it has very limited uptake in the USA – both players and spectators. Sport in the USA has a high income elasticity of demand which means a change in income results in a greater percentage increase in demand. An Indian Media firm – Times of India Group – are hoping to tap into the American market and put on high profile cricket matches with the leading players in the game. The games generally take place in baseball stadiums but the firm is considering building cricket stadiums.

Highest paid sports leagues 2014-2015 season.

Top paid sports leagues.png

Source: CIE AS & A Level Revision Guide by Susan Grant

Revenue of European Football Leagues – money doesn’t mean success.

The English Premier League (EPL) is by far the richest in Europe with its revenue around €5bn in 2017 with only La Liga (Spain) and the Bundesliga (Germany) coming in at just under €3bn. However if you look at the performance of EPL teams in the Champions League their performance hasn’t been that good – no EPL team has reached the final of the Champions League since 2012. One reason for this might be that fees paid by the TV companies are divided more equally amongst all EPL teams which prevents a monopoly situation from emerging. In other major leagues in Europe the more successful teams have taken a greater share of their leagues profits.

Between 2003 and 2012, UEFA paid out €5.6 billion in prize money to teams competing in the Champions League. Some 45% of that prize money went to just 10 teams, which competed in almost every season and received an average €256 million each over the decade, or €25.6 million in every season. By contrast, there were another 85 clubs that participated over the decade but only for 2.7 seasons on average and they received only €3.6 million on average for each season they played. This means that these clubs received only €10 million on average over the entire decade. To put it another way, each of the big clubs every year gets more than two and a half times as much Champions League broadcast revenue as each of the remaining teams can expect to make in a decade. As a result of this it is not surprising in 2016 the German, French and Italian leagues endured a fourth consecutive year with the same champion, while Leicester City lifted the title in England. However La Liga have recently introduced a much fairer system of distribution of income amongst teams.

Sources:

  • The Economist – The wealth and mediocrity of English football. 2017
  • Money and Soccer: A Soccernomics Guide: By Stefan Szymanski. 2015

Football Revenues.png

Why Neymar's transfer fee could make economic sense.

Late August is often a very busy time for football clubs as the transfer window closes and this year was no exception with Neymar da Silva Santos Junior being signed by French club Paris Saint-Germain (PSG) from Barcelona for a staggering €222m. How can a club afford a record signing – more than double the previous record price for a footballer? To put this is perspective Paris Saint-Germain is owned by Oryx Qatar Sports Investment, a privately held company based in Doha, which is in fact an investment vehicle for the Qatar government. Neymar will cost PSG’s owners about €500m over five years but he is an investment which the club hope to take advantage of.

From PSG’s perspective, the price tag requires close scrutiny. Although transfer fees have generally increased with the sport’s revenues over time, their share of clubs’ overall spending has remained more or less steady: big clubs are reluctant to surrender more than a quarter of their annual revenue on a single player. Just four of the 19 European transfers so far to have cost €60m or more have exceeded this threshold. Neymar’s deal blows through it: he is likely to cost PSG around 40% of next year’s turnover (see chart below). No top team has spent such a large chunk of its income on a player since the signings of Mr Figo and Zinedine Zidane at the turn of the century. The only other player to command more than 25% of a club’s revenues was Radamel Falcao, who was bought shortly after AS Monaco won promotion from France’s second division, where broadcasting and sponsorship revenue are much lower.

Neymar.png

So how will PSG recoup the cost of Neymar?

  • Match day tickets and corporate hospitality sales.
  • Broadcasting rights – domestic leagues, cups and Champions League.
  • Commercial sources – playing kit merchandise – on the day the signing was announced fans queued up at the PSG merchandise shop and bought over 10,000 shirts at $118 each. Additional sponsorships and image rights given Neymar’s marketability. 59% of PSG’s revenue of €520m last year was commercial i.e. other than ticket sales and broadcasting fees.
  • Instagram – Neymar has more followers on Instagram than Nike and this following will help PSG negotiate a deal greater than the current €24m it receives from Nike each year. Barcelona are to receive €155m from 2018 for wearing a Nike playing strip.
  • Overseas supporters – Manchester Utd are the most popular team on Chinese social media although they haven’t qualified for the Champions League for the last couple of seasons. If Neymar can bring success to PSG maybe this will open the door to new and much bigger markets.

A good performance in the Champions League will no doubt lessen the burden on PSG – only time will tell. Their campaign starts on Tuesday with an away game at Celtic.

Source: The Economist – August 12th 2017

More loss aversion in male tennis players when behind.

A paper entitiled ‘Is Roger Federer more loss averse than Serena Williams?’published by By Nejat Anbarci, K. Peren Arin, Cagla Okten and Christina Zenker on tennis serving and loss aversion caught my attention. The paper found that:

Roger_Federer.jpg
1 a server will put more effort into his/her serve speed when behind in score than when ahead in score,
2 players’ effort levels and thus serve speeds get less sensitive to losses or gains
when score difference gets too large,
3 A female player, on the other hand, does not change her serve speed and thus her effort when behind compared to when the score is tied, while she serves slower when ahead than when the score is tied.
4. Overall servers will be more risk averse in the domain of gains than in the domain of losses.
Researchers used serve speed at different points of matches in the high-stakes, professional Dubai Tennis Tournament to test their theoretical predictions and whether overall players exhibited the fundamental bias of loss aversion.

 

Loss Aversion and the  Endowment Effect

Loss aversion can be explained by prospect theory, which states that an individual’s value function (whether for money or otherwise) is concave for gains but convex for losses. In other words, people are more sensitive to losses compared to gains of similar magnitude. This is illustrated below.

Prospect theory

The reference point in the diagram is the current position of the individual concerned. Gains and losses are evaluated with reference to this neutral reference point. The value function takes an asymmetric S-shape because marginal value (or sensitivity) declines as absolute gains and losses increase in size. A dollar lost more than outweighs a dollar gained. In conventional economics, gains and losses are treated equally – a dollar lost simply cancels out a dollar gained. Golf provides a perfect example of a reference point: par. Every hole on a golf course has a number of strokes associated with it; the par provides the baseline for good – but not outstanding – performance. For a professional golfer, a birdie (one stroke under par) is a gain, and a bogey (one stroke over par) is a loss. Economists have compared two situations a player might face when hear the hole:

  • putt to avoid a bogey
  • putt to achieve a birdie

One group of economists analysed more than 2.5 million putts in exquisite detail to test that prediction and found that whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie. The difference in their rate of success when going for par (to avoid a bogey) or for a birdie was 3.6%.