The Reallocation of Sport Franchises: Should Taxpayers Care?

This question has been raised in Houston over the years with the departure of the Houston Oilers, the much talked about departure of the Houston Astros to Northern Virginia (1995) and of the Houston Rockets to Louisville, KY (2000), and the arrival of the Houston Texans (2001).

As it is well known, the threat of departure made by the owner of the Houston Astros and the similar threat made by the owner of the Houston Rockets led to sweet new stadium deals for the owner of both franchises. The potential departure of local sports franchises is usually strongly rejected by local sports fans. This reaction, of course, is understandable. The usual reaction of city officials is to try to create financial incentives for these sports franchises to stay at home. This is reaction would be understandable only if the departure of a sport franchise hurts the average local resident. That is, the important question, seldom asked in the local press, is: do sports franchises add value to a city?


A Simple Model of Consumer Behavior

Consumers have disposable income that they spent in different activities. One of these activities is entertainment. The budget for entertainment is a proportion of disposable income, say, 10%. The average consumer is going to spend his/hers entertainment money in different entertainment activities. Watching sporting events is one of the many entertainment activities a consumer has in a big city. It is not the only one. Assuming goods substitution, if a consumer cannot be entertained by an event, he or she would be entertained by other event, say a movie, a play, a dance lesson, a music concert, etc. That is, if an entertainment event is not available, the other available events are going to benefit. For example, entertainment substitution occurs at the movie theaters every night. When a movie is sold out, the other movies, shown at the movie complex, benefit. Some consumers have a strong preference for a given movie, but the majority of the consumers will watch other movies. Some of the consumers with a strong preference for a given movie end up at a bar, dancing, or renting a movie. That is, for the majority of the consumers, the entertainment budget is spent on entertainment!

Now, let's go back to sport franchises. Suppose a sports franchise leaves your town. The losers are going to be the hard-core fans, the ones that can never substitute a given sports event for another. These hard-core fans, based on the evidence of another cities where franchises left town for (dollar) greener pastures, are small in numbers. (By the way, these hard-core fans will experience an increase in their savings, something that might lower interest rates in the local communities! This is a joke; the impact should be negligible.) The winners from a franchise leaving town are the owner of other entertainment venues: bars, discos, restaurants, museums, movie theaters, theaters, local musicians, etc. Overall, from a consumer spending point of view let the franchise move. On the other hand, when a franchise comes to town, there will be a reallocation of consumer spending. The losers in this case are going to be bars, discos, restaurants, movie theaters, theaters, local musicians, etc. The winners are the owner of the sports franchise coming to town and the few hard-core sports fans.

Thus, there is no significant decrease of consumer spending at the aggregate local level if a sports franchise leaves town.


Other Arguments from the Pro-Sports Lobbies

  • "A sport franchise creates jobs"

    Many politicians and business leaders claim that a new stadium will bring jobs to the city. For example, in 1994, when the Houston Astros were talking about leaving town, the lobbyists for the Houston Astros and the lobbyists for the construction companies that would benefit from the construction made this claim. Now, unless there is significant unemployment, there will be a reallocation of jobs. That is, if anything happens, labor costs should be pushed up. And low unemployment rates have been the staple of the economy in the 1990s. Even with significant unemployment, the impact would be minimal. After all, sport franchises employ a small number of workers. Besides, the construction of a stadium is a temporary event, with no long-term effect at the unemployment local office.

  • "It doesn't cost the taxpayers anything"

    Usually, when a firm expands, the financing comes from the new revenue generated by the expansion. If there is no new revenue, a firm does not expand. But in the case of the business of sports, expansion financing seems to be different. In general, new stadiums are built with bonds, which are going to be repaid with taxes -the usual source of revenue of governments. The new trend is to finance stadiums with taxes that locals do not directly pay: rent-a-car taxes, hotel taxes, etc. If we believe -as taught in Economics 101- that the demand for goods and services is downward sloped, rent-a-car companies, hotels, etc. are going to see a decrease in their business. Besides, local businesses are going to see an increase in the cost of bringing out-of-town temporary employees, experts, visitors, etc. Thus, for many local firms costs go up because of the new taxes -which "supposedly" are paid only by out-of-towners. The tax has an indirect effect on local prices: some local prices go up!

    In addition, there is a fairness question: is it fair to ask a person (an out-of-town visitor) to pay for something (the new stadium) that he/she will never use? It doesn't. After all, remeber the American Revolution: no taxation without representation.

  • "Downtown revitalization"

    This is an argument used in many cities, with old downtown infrastructures. Given that the downtown infrastructure is old, there is plenty of cheap land for the construction of a new sports arena. The supposed revitalization of Cleveland's downtown after the construction of Jacob's Field is used as an example. This argument is a political one. Not an economic one. For some reason, the lobbyists for the sports franchise and construction firms believe that a city has to favor -i.e., spend public funds on- a part of the town over another. This choice is usually driven by demographics, value of land, services available, etc. But the pro-sports lobbyists push an area of town -where land is cheap- to be "revitalized." Besides, why invest in this area, which was abandoned for a reason, and not in others?


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    written on March 10, 2001.