The Olympic Trade Effect

• Author: Andrew K. Rose/Mark M. Spiegel
• Position: B.T. Rocca Professor of Economic Analysis and Policy at the Haas School of Business, University of California, Berkeley/Vice President for International Research at the Federal Reserve Bank of San Francisco

ECONOMISTS are usually skeptical of arguments about the public provision of infrastructure for sporting events, and rightly so. Agents who endorse the construction of new sports stadiums or the staging of mega sporting events usually do so out of naiveté or self-interest. In practice, these events are expensive, especially for developing countries. The opening ceremonies of the 2008 Beijing Games are estimated to have cost well over $100 million-while at least 100 million Chinese live on less than $1 a day.

Rio de Janeiro recently won the right to host the 2016 Olympic Games with a $15 billion bid, a sum equal to over $2,000 for each citizen of Rio, even before the expected cost overruns. A substantial part of this money is planned to go toward upgrading the city’s transportation system. But if transport investments make sense for a large city with the Olympics looming, don’t such investments just plain make sense, without the spur of hosting the Olympics? Should long-term investment decisions really be tied to peak demand that lasts just two and a half weeks? More generally, the motivation for hosting a mega event like the Olympics seems elusive to economists. Plausibly measured direct net economic effects are rarely large and typically negative; noneconomic benefits are difficult to verify. Can funding mega events possibly be a good use of the public treasury? Perhaps: the doubts of professional economists are rarely shared by policymakers and the local population, which is typically enthusiastic about such spectacles. In practice, countries compete fiercely for the right to host mega events. Is it possible that the economics profession is missing something?

The International Olympic Committee (IOC) certainly believes so. The IOC believes visitors will be drawn to host-city venues and products after being exposed to them through the games. This boils down to a view that hosting the Olympics will promote a nation’s exports, especially its tourism. We are dubious of the practical relevance of this argument; any export boost from the Olympics would seem to be both small and transient. We thus began our recent research by examining this theory empirically.

We use a standard "gravity" model of trade, which predicts that trade volumes between two countries will be a function of their distance from each other and a number of other explanatory variables. This model has been widely shown in the literature to explain a large...