The Economics of Sport and Entertainment: Public Financing of Sport

This report delves into the economics of public financing in sports, examining the historical context of stadium construction and the evolving relationship between sports franchises and host cities. It explores how teams leverage their mobility to secure favorable deals, analyzes the four distinct eras of stadium construction, and discusses the concept of economic profit as it relates to team relocation decisions, using the Dodgers' move from Brooklyn to Los Angeles as a key example. The report also examines the ways in which teams exploit monopoly power in their dealings with municipalities and the impact of league structures on market dynamics. The report further investigates the impact of exchange rates and stadium location on cities' abilities to retain franchises and subsidize facilities, and evaluates different methods of financing public support for sports facilities, concluding with an analysis of the economic challenges and trends affecting stadium financing in the modern era. The report draws upon historical examples and economic principles to provide a comprehensive understanding of the complex financial landscape of professional sports.

THE ECONOMICS OF SP
ENTERTAINMENT
ECON2005

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PUBLIC FINANCING OF SPORT - WHO PAYS?

PUBLIC FINANCING OF SPORT - WHO PAYS?
INTRODUCTION
▸ One day in the late 1950s, Jack Newfield and Pete Hamill, both reporters fo
New York newspapers, discussed writing an article called “The Ten Worst
Human Beings Who Ever Lived.” On a whim, each wrote the names of the t
people he regarded as “the all-time worst” on a napkin. To their amazemen
they listed the same three names: Adolf Hitler, Joseph Stalin, and Walter
O’Malley.
▸ O’Malley committed neither war crimes nor genocide. Instead, he forever
changed the landscape of professional sports by moving the Dodgers from
Brooklyn to Los Angeles.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
INTRODUCTION
▸ From that point on, sports franchises recognised that they had tremendous
leverage in their dealings with the cities that hosted them. They were quick
exercise that market power, insisting that cities bear a much greater share
the burden of constructing and maintaining sports venues than they had in
past.
▸ We explain the source of the teams’ market power and show how teams
exercise it in their dealings with cities, show that the cost of construction h
dictate where cities place stadiums, and we evaluate the ways cities fund t
construction of facilities that now typically cost billions of dollars.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
LEARNING OBJECTIVES
▸ Appreciate the connection between the mobility of sports franchises and th
increase in public funding of stadiums and arenas.
▸ Understand the ways that sports teams, leagues, and institutions exercise
monopoly power in their dealings with municipalities.
▸ Grasp the impact that exchange rates and stadium location have on the ab
of cities to retain franchises and subsidise facilities.
▸ Appreciate the advantages and disadvantages of different methods of
financing public support of sports facilities.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
HOW CITIES CAME TO FUND STADIUMS
▸ In the North American leagues it seems normal for teams to threaten to look
a new home unless their current host city builds a new facility or restructure
rental agreement on the current one.
▸ In the 19th century, teams entered, exited, and moved so frequently that th
were reluctant to erect permanent facilities. In general, they moved from sm
towns to large cities.
▸ Professional football did not become financially stable until teams like the
Decatur Staleys and Portsmouth Spartans had moved to large cities to beco
the Chicago Bears and Detroit Lions
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PUBLIC FINANCING OF SPORT - WHO PAYS?
HOW CITIES CAME TO FUND STADIUMS
▸ Between 1920 and 1935, over 50 teams played at least one season in the NFL, 43
which had folded or relocated by the end of that era.
▸ Unfavourable locations proved the undoing of entire leagues, e.g.:
▸ the demise of baseball’s American Association in the 1890’s
▸ the National Basketball League (NBL) in the 1940’s
▸ the women’s American Basketball League in the 1990’s
▸ Following the merger of the Basketball Association of America and the NBL in 194
to form the NBA, only 8 of the original 23 teams still existed after 5 years, and 4
the remaining teams had relocated by 1960
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PUBLIC FINANCING OF SPORT - WHO PAYS?
HOW CITIES CAME TO FUND STADIUMS
▸ The Brooklyn Dodgers were the most successful and most profitable team in
National League, moreover they were “a cultural totem” for the residents of
Brooklyn, a rallying point for those who felt scorned by the wealthier, more
sophisticated Manhattanites.
▸ It was this sense of loss—and the sense of powerlessness that accompanied
that prompted the sportswriters to elevate O’Malley to the elite company of
Hitler and Stalin.
▸ However, while the Dodgers did well in Brooklyn O’Malley realised that they
would have done even better if they had been in Los Angeles!
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PUBLIC FINANCING OF SPORT - WHO PAYS?
HOW CITIES CAME TO FUND STADIUMS
▸ O’Malley recognised the difference between accounting and economic profi
▸ Accounting profit is what we typically think of as profit, the revenue a
makes minus its explicit cost of production.
▸ Economic profit equals revenue minus all opportunity costs of the firm
production decisions.
▸ Opportunity costs include the explicit costs of the resources used in
production process plus the profit that could have been earned in the
firm’s best alternative activity.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
HOW CITIES CAME TO FUND STADIUMS
▸ In this case, a major opportunity cost of O’Malley’s keeping the Dodgers in
Brooklyn was the revenue they could have earned had they moved to Los
Angeles.
▸ Because economic profit subtracts all costs, a firm can have negative econo
profit even when its accounting profit is very high.
▸ The Dodgers thus had very high accounting profits, but the profit they
sacrificed by playing in front of about 1 million fans each year in Brooklyn
rather than over 2 million fans in Los Angeles was too great to ignore.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
THE FOUR ERAS OF STADIUM CONSTRUCTION
▸ The first period or the “entrepreneurial period,” lasted from 1890 to 1930
▸ During this period, the owners of baseball teams built and operated their ow
ballparks. The owners of several hockey teams did the same thing, as it wa
dominant professional sport in the United States.
▸ In contrast, football teams lacked both the money and the fans to construct
their own stadiums, and basketball did not even have a stable league.
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PUBLIC FINANCING OF SPORT - WHO PAYS?
THE FOUR ERAS OF STADIUM CONSTRUCTION
▸ Almost all the facilities built during this period had two common features.
▸ First, only one facility had the word stadium in its title. The rest had names
Wrigley Field or Shibe Park.
▸ The use of the words Park and Field reflects the pastoral origins of base
as teams played in open fields or parks.
▸ The term stadium was not used until Jacob Ruppert applied the name to
his new “Yankee Stadium” in 1923 to recall the grandeur of classical
architecture.
▸ Second, most of the ballparks, with exceptions like Fenway Park, bore the n
of the owner of the team for which the stadium was built.
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