Thesis Corner: Is Hosting the Olympics Really Worth the Gold (Standard)?

Throwing a giant party is a daunting task. It requires a lot of pre-planning, a lot of money for food and entertainment, and a lot of time cleaning up after everyone has gone home. Now imagine hosting the world’s biggest party – the Olympics. The intense competition between countries as they fight to win the bid for host suggests that the benefits of hosting the Olympics outweigh the costs. But is hosting the Olympics really all it’s cracked-up to be? Senior, Holly Ross explores and critiques two common methods of analysis countries use when deciding whether or not to put their name in for consideration as host.

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MT: What’s the gist of your thesis? 

HR: My thesis examines the strengths and weaknesses between two commonly used economic forecasting tools: economic impact analysis (EIA) and cost benefit analysis (CBA). With local cities hosting global mega-events, it is crucial for policy makers to consider every economic and social dimension with such a monumental decision. I assessed how well (or shortcoming) forecasting reports were done for the London Olympics to add some perspective to these differing methodologies.

MT: So what is the difference between EIA and CBA?

HR: EIA is very finance focused whereas CBA assesses worthiness of projects through externalities. Currently, policy makers favor EIA because it better illustrates the tangible economic gains from hosting an event than CBA. In brevity, EIAs ask “How much do we make? How much do we spend? Okay, now what’s the difference”. Items in CBAs are a bit more abstract since it incorporates literal costs and attempts to quantify positive and negative externalities from an event.

MT: What were some critiques you found on both methods?Screen shot 2014-03-27 at 8.28.09 PM

HR: EIA reports tend to have convincing multipliers and favorable revenue estimates that make policy makers inclined to approve events. Recent literature has questioned the EIA calculations of revenue and cost, believing many underlying assumptions are either too optimistic or methodologically flawed. CBA’s biggest drawback is attempting to economically express things that are not typically quantifiable. An example of this is pollution. Sure we can measure how much pollution a factory generates, but it’s difficult to identify the social cost (ie. deaths, standard of living) and economic implications.

MT: So what conclusions did you draw about EIA and CBA looking at London?

HR: I examined two EIAs taken before the London Olympics. First thing I noticed was that there is no standardized procedure for conducting EIA. My first recommendation is that there should be a similar way to fashion EIAs in order to represent information objectively. The second thing I noticed was that the economists who worked on the London Olympic forecasts were coached to encompass positive and negative externalities into their reports. To me this indicated that economists to some degree are starting to realize the shortcoming of EIA alone and forging a new type of undertaking that marries both EIA and CBA elements. By no means were the reports perfect, I still argue there is still need for improvement.

MT: Tell us more about the London Olympics. What are some negative and positive externalities associated with it?

HR: Common positive externalities with the Olympics include national pride, increased athleticism, and tourism attention. For London specifically, urban regeneration of the East End was probably the biggest legacy. Some examples of negative externalities are overcrowding and security risk. The Olympics draws so much tourism that locals or other non-Olympic travelers may be deterred to come at all. Additionally, London being a common target for terrorist activity has economic implications as people are willing to forgo the Olympics for their safety. One of my assertions is that forecasting studies must understand how these events will sway public behavior and how these aggregated behaviors translate into economic impact.

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