Reader mailbag - competition for the sporting market edition

A learned reader writes in response to the post on competition among sporting leagues:

You are generally right about the lack of competition for the market in sport but I suggest you have a look at FINA, the world body and Olympic entity for most aquatic sports: swimming; diving; water polo; artistic swimming (formerly synchronised swimming); high diving; and open water swimming, along with masters for all these events. It faces competition for the sport in high diving, open water swimming, swimming and provision of competitions for masters (ie the geriatric). In swimming there are three competitors to FINA: international life saving that has a lot of swimming events, including many held in pools with international competitions; NCAA, about which you will know more than me; and now the International Swimming League (ISL). The latter runs a series of international teams events with some different formats for competition e.g. skins.

After some argie bargie and arm wrestling FINA and ISL have worked out how to co-exist in competition. You can now set FINA world records at an ISL event i.e. they have decided it is pointless to have two sets of world records.

Guess what? Among the world bodies controlling sport I think you will find that FINA is right up there in terms of innovation and trying to satisfy participants and the audience. Way ahead of IAAF, FIFA and most of the other Olympic bodies. The only organisation that comes close, that I am aware of, is UCI, the controlling body of road cycling, track cycling, bmx, cyclocross and mountain biking. UCI effectively contracts out its major road cycling events around the world to commercial entities. The events these companies run largely fund UCI and the companies have a big say in driving it. Swimming at the Olympics draws the largest female/male audience. Gymnastics the largest female audience and Athletics the largest male audience. You don’t see much swimming in NZ on TV as they are very much into rugby, soccer and other team sports and tennis i.e. New Zealanders like watching on TV sports where they can get very annoyed by the referees interfering in the outcome.

... Two of the [FINA] innovations were the introduction of mixed relays (2 men and 2 women) and use of wet suits in cold water temperatures in Open Water swimming. Why NZ would favour these innovations is pretty obvious. Both these have been adopted and have been great successes among participants and audiences.

Why has FINA “tolerated” competition but many other international sporting organisations do not or have not faced it? Am I right about the results of competition for the sport in swimming?

I'm also reminded of an excellent student essay in my graduate public choice class from... over a dozen years ago now... looking at the political economy of Formula One racing and how the threat of teams exiting to form their own league forced some innovation and changes in revenue sharing. In car racing, there's innovation within codes, and competition across codes (F1, Indy, NASCAR, probably more that I don't know about). 

We're heavily into territory where I haven't enough grasp about the stylised facts to be able to do much. It feels like the lack of credible threat of exit will matter in the North American leagues. 

The bout round the bach? The fight in the Ferns?

I chatted this afternoon with Jim Mora's Panel at Radio NZ about the potential government funding of a coming boxing match. There's apparently been Cabinet-level discussion of whether the government should throw money at the boxing match to make sure it happens in New Zealand rather than someplace else.

I covered a few points:

1. A boxing match is a commercial endeavour. If investors thought it would be more profitable here than it would be hosted elsewhere, they’d be putting in private money in anticipation of that return. 
2. Government funding to bring it here then only makes sense if:
   1. It would not have happened here unless it were funded (likely); but more critically,
   2. There is a real benefit to New Zealand in hosting the match here that would not be enjoyed were it hosted elsewhere; and, further,
   3. That this benefit, relative to the government’s outlay, is bigger than the government can get from spending the money elsewhere, or from leaving it in taxpayers’ pockets in the first place.
3. Governments love subsidising big sporting events. They talk a lot about the extra spending that tourists coming to events bring with them, but the kinds of studies backing these things up are usually pretty flawed. 
   1. First, they’ll count spending by visitors rather than profits on spending by visitors. Where there are costs involved in providing services to visitors, those need to be brought into the analysis.
   2. Second, they’ll assume that the visits would not have happened but for the event, and that the visits that do happen do not displace other visits. Both of these are often wrong. People who had always planned on visiting New Zealand and who like the event might shift the timing of a visit to coincide with the event. And other people who could only visit New Zealand during the time of the event might be put off: hotels get booked out for big events, for example, and rental caravans can be hard to find during things like the Lions’ tour. Just looking at the spike of visits during a big international event isn’t enough. You also have to account for displacement.
   3. Finally, none of this much enters into the picture for a boxing match which would draw fewer tourists in than a big sporting tour anyway.
4. Minister Joyce noted that he’d hope that the government might be paid back if the match turned a profit. If I were operating under that kind of contract, I’d be pretty sure to pay myself and staff bonuses big enough to make sure there weren’t profits, or to buy my supplies from a related company at inflated prices to make sure there weren’t profits to pay back. But maybe the companies with whom the government strikes these kinds of deals are more publicly spirited.

Government funding of boxing matches... I'm just reminded too much of Mobutu Sese Seko fronting the costs to host the Foreman-Ali fight: the Rumble in the Jungle.

RNZ's panellists weren't having a bar of it either. Neill Miller has great economic intuitions - he also pointed to most of the stuff that I covered. And I doubt I'd disagree with Gordon Harcourt's take that the main point isn't the economic benefits of having tv cameras reporting from an indoor arena in Auckland instead of wherever else, but rather the potential drawing of voting support from South Auckland fans of Joseph Parker.

I followed on immediately after Marewa Glower's excellent discussion of vaping as a way of avoiding the weight gains that otherwise may come with quitting smoking.

Update: Catch also Sam Richardson on point here. I also heard him on Radio NZ on the way in to work this morning.

How unfair is the Super 15 schedule?

In advance of the semi-final between the Crusaders and the Sharks this evening, it is timely to look at the fairness of the Super 15 schedule. The Crusaders are playing at home, a massive advantage that they earned by virtue of finishing one point ahead of the Sharks in the regular season. But was that a fair reflection of the two teams? 

The Super 15 rugby competition is a bit unusual in its unbalance. There are five teams from each of three countries. Each team plays the other four teams in its country twice, home and away; it plays four of the five teams from each of the other two countries once, two games at home and two away; and it doesn’t play the remaining two teams at all. This leads to three reasons why a schedule may favour some teams over others: First, teams from stronger countries have to play more games against each other making it harder for the best teams from those countries to finish ahead of the best teams from weaker countries; second, a team is favoured if the two teams it doesn’t have to play are relatively weak strong; and third, for the best teams, there is an advantage to playing the stronger teams from other countries at home to get the benefit of home-field advantage, and play away against weaker teams who can be expected to lose in any location. 

Mark Reason recently had an article in the Dominion Post suggesting that these factors led the Crusaders (who finished the regular season in second place overall) to have been favoured in this year’s competition and to have penalised the Hurricanes (who finished seventh and out of the playoffs) . His logic seemed impeccable to me; certainly it seemed that the Crusaders benefited from the luck of the draw this year relative to recent years when they had to play the best South African teams in South Africa.

I am currently doing some research constructing rankings for international cricket, and thought it would be fun to use the same method to infer how teams would have finished in the Super 15 had they had a balanced schedule. Kirdan Lees has beaten me to it, in a welcome new blog: Sport Loves Data. Kirdan has reevaluated the ranking of the 15 teams, taking into account the imbalance in the schedule, and has posted his results here. Given that Kirdan’s method is very different from mine, I decided to see how the two methods would compare. The table below gives the actual points table, and my revised points table adjusted for schedule unfairness. (The TL;DR explanation of my method is detailed at the bottom of this post.)

Team	Actual	Predicted
Waratahs	58	58.5
Crusaders	51	50.1
Sharks	50	52.4
Brumbies	45	45.0
Chiefs	44	42.6
Highlanders	42	37.7
Hurricanes	41	40.7
Western Force	40	40.2
Bulls	38	38.3
Blues	37	38.1
Stormers	32	33.4
Lions	31	33.8
Reds	28	24.5
Cheetahs	24	23.9
Rebels	21	23.1

Kirdan's method gives rankings rather than points, so the following table shows just the assumed finishing position: 

Team	Actual	Predicted	Kirdan
Waratahs	1	1	1
Crusaders	2	3	2
Sharks	3	2	4
Brumbies	4	4	3
Chiefs	5	5	6
Highlanders	6	10	7
Hurricanes	7	6	5
Western Force	8	7	11=
Bulls	9	8	9
Blues	10	9	10
Stormers	11	12	8
Lions	12	11	11=
Reds	13	13	14
Cheetahs	14	14	13
Rebels	15	15	15

The interesting thing is that my and Mark Reason’s intuition about how much the Crusaders were favoured this year turns out to have been overblown, although the method does result in my having the Crusader’s ranked just behind the Sharks rather than slightly ahead. And yes, the Hurricanes would have qualified for the playoffs as one of the top six teams using my or Kirdan's rankings, but using my method the reason is not that the method pushed them up but rather that the big mover was the Highlanders, who appear to have been hugely favoured by the schedule this year. 

Postscript: Kirdan has another post looking at home field advantage in the Super 15. My probit regression method, would require a lot more data to analyse team-specific home field advantage, but in a model which assumes that the advantage is constant across teams, the result is that home-field matters so much in the Super 15 that, in a match between two teams of equal ability, the one playing at home has a 75% chance of winning. It is no surprise that the Super rugby competition has almost always been won by the team that finished first in the regular season, and who therefore are not only likely the strongest team, but also earn home-field advantage throughout the playoffs. 

TL;DR Explanation of Method: 

• There are two separate LHS variables, each estimated by an ordered probit regression: table points scored by home team, table points scored by away team. Each can take the values 0, 1, 2, 3, 4, 5. 
• My database only included the scores, not the bonus points scored. The actual points earned by each team for winning, tying, or losing by 7 points or less, can be inferred from the scores, but not bonus points for scoring 4 tries or more. I proxied this by assigning a bonus point if the team scored 30 points or more. The method proceeds as follows: 

1. Generate a dummy for each of the 15 teams that equals 1 if that team was the home team, and -1 if it was the away team.
2. Run two ordered probits, one for points scored by the home team, and one for points scored by the away team, in each case run on the 15 dummies (one dropped) and a constant. 
3. Predict the probability of scoring 0,1,2,3,4,5 points for each of the 210 possible matchups (each team playing each other home or away), and found the expected points for each.
4. Then sum these to get the total points in a balanced competition where every team plays every other twice, home and away.
5. Finally, normalise these by a linear transformation to get the same mean and s.d. as the actual super 15 points table.

Labour economics: golf caddying edition

Radio Sport yesterday was consumed with a debate about whether Steve Williams, the caddy for Masters winner, Adam Scott, is worth the money he is paid.

For those who don't follow golf, here is the background. Steve Williams is a New Zealander who was the professional caddy for Tiger Williams in his heyday (1999-2011). They had an acrimonious break-up two years ago, and since then Williams has been caddying for the Australian, Adam Scott. Williams' contract sees him earning 10% of Scott's prize earnings, which I gather is a typical contract for a professional caddy. Obviously, if you can caddy for one of the greats, that is a very lucrative contract indeed. (The prize for winning the Masters this year was $1.44m USD.)

Now the debate on Radio Sport concerned whether any caddy is worth that amount of money. And for an economist, "worth" would typically mean what a caddy can contribute relative to the next best alternative. Is it really the case that a top caddy can improve a golfer's winnings by more than 10%, relative to what he would earn with one of the throng of enthusiastic golf fans who would be prepared to do the job for a normal kind of salary? While there has been much commentary on the advice that Williams gave Scott on his winning shot at the Masters this week, it seems unlikely that the best caddy is really that much better than the alternative.

There is a second labour-economics question that I did not hear addressed on Radio Sport: Why are caddies paid on a commission basis (percentage of income) rather than a flat rate? The standard answers to these questions from the contract literature would be that either the golfer is more risk averse than the caddy, or that this is a hidden-information problem and that the caddy needs a financial incentive to exert the effort needed to do a good job. The former hardly seems likely given the relative incomes of the golfer and his caddy. The second is even less likely to pass the sniff test: Does it really take additional costly effort to give good advice on which club to use and how a putt is likely to break?

Instead, maybe we should be looking to the efficiency wage literature which contains a number of different theories for why above-market-clearing wages can persist in the face of unemployment. My favourite model to explain caddy wages would be Shapiro and Stiglitz's classic model of shirking. In their model, the high ("efficiency") wage persists as a preference for employment over unemployment is needed to induce a fear of being fired and hence an incentive not to shirk in the face of costly monitoring of effort. The model I have in mind for caddies is similar. The top golfers are big superstars whose flaws and foibles would be fodder for the tabloids. A caddy who works closely with a golfer is likely to have considerable information that tabloids would love to get hold of. So why might one pay above the market-clearing wage for a caddy? So that the cost to the caddy of losing his job would not be dwarfed by payments he might be offered by a tabloid. And why pay caddies on a commission basis? Because the greater is a golfer's earnings, the greater is his stardom, the more a tabloid would be prepared to pay for information, and hence the greater would be the needed efficiency wage.

What other explanations explain the twin puzzle of high remuneration and a percentage-of-earnings contract. If I were teaching labour economics, I would set this as an essay question.

Cricket and the Wasp: Shameless self promotion (Wonkish).

[UPDATE: January 2015. The post below dates from November 2012 when New Zealand's Sky TV first introduced the WASP in coverage of domestic limited overs cricket. For fans coming here as a result of its being used in the current NZ v SL series, please see here for an FAQ. For an explanation of what cricket has to do with Economics, see here; and for all the cricket posts on Offsetting Behaviour, see here.]

In their coverage of the Wellington-Auckland game in the HRV cup last Friday, Sky Sport introduced WASP—the “winning and score predictor” for use in limited-overs games, either 50-over or 20-20 format. In the first innings, the WASP gives a predicted score. In the second innings, it gives a probability of the batting team winning the match.

I am very happy about this as it is based on research by my former doctoral student, Scott Brooker, and me. Not surprisingly, the commentators didn’t go into any details about the way the predictions are calculated, so I thought I would explain the inner workings in a wonkish blog post.

The first thing to note is that the predictions are not forecasts that could be used to set TAB betting odds. Rather they are estimates about how well the average batting team would do against the average bowling team in the conditions under which the game is being played given the current state of the game. That is, the "predictions" are more a measure of how well the teams have done to that point, rather than forecasts of how well they will do from that point on. As an example, imagine that Zimbabwe were playing Australia and halfway through the second innings had done well enough to have their noses in front. WASP might give a winning probability for Zimbabwe of 55%, but, based on past performance, one would still favour Australia to win the game. That prediction, however, would be using prior information about the ability of the teams, and so is not interesting as a statement about how a specific match is unfolding. Also, the winning probabilities are rounded off to the nearest integer, so WASP will likely show a probability of winning of either 0% or 100% before the game actually finishes, even though the result is not literally certain at that point.

The models are based on a database of all non-shortened ODI and 20-20 games played between top-eight countries since late 2006 (slightly further back for 20-20 games). The first-innings model estimates the additional runs likely to be scored as a function of the number of balls and wickets remaining. The second innings model estimates the probability of winning as a function of balls and wickets remaining, runs scored to date, and the target score.

The estimates are constructed from a dynamic programme rather than just fitting curves through the data. To illustrate, in the first innings model to calculate the expected additional runs when a given number of balls and wickets remain, we could just average the additional runs scored in all matches when that situation arose. This would work fine for situations that have arisen a lot such as 1 wicket down after 10 overs, or 5 wickets down after 40 overs, etc.), but for rare situations like 5 wickets down after 10 overs or 1 wicket down after 40 it would be problematic, partly because of a lack of precision when sample sizes are small but more importantly because those rare situations will be overpopulated with games where there was a mismatch in skills between the two teams. Instead, what we do is estimate the expected runs and the probability of a wicket falling on the next ball only. Let V(b,w) be the expected additional runs for the rest of the innings when b (legitimate) balls have been bowled and w wickets have been lost, and let r(b,w) and p(b,w) be, respectively, the estimated expected runs and the probability of a wicket on the next ball in that situation. We can then write

V(b,w) =r(b,w) +p(b,w) V(b+1,w+1) +(1-p(b,w)))V(b+1,w)

Since V(b*,w)=0 where b* equals the maximum number of legitimate deliveries allowed in the innings (300 in a 50 over game), we can solve the model backwards. This means that the estimates for V(b,w) in rare situations depends only slightly on the estimated runs and probability of a wicket on that ball, and mostly on the values of V(b+1,w) and V(b+1,w+1), which will be mostly determined by thick data points. The second innings model is a bit more complicated, but uses essentially the same logic.

Now many authors have applied dynamic programming to analyse sporting events including limited overs cricket (see my previous post on this here), although I don’t know of any previous uses of such models in providing real-time information to the viewing public. Scott’s and my main contribution, however, is in including in our models an adjustment for the ease of batting conditions. I have previously blogged about our model for estimating ground conditions, here. Without that adjustment, the models would overstate the advantage or disadvantage a team would have if they made a good or bad start, respectively, since those occurrences in the data would be correlated with ground conditions that apply to both teams. Using a novel technique we have developed, we have been able to estimate ground conditions from historical games and so control for that confounding effect in our estimated models.

In the games on Sky, a judgement is made on what the average first innings score would be for the average batting team playing the average bowling team in those conditions, and the models’ predictions are normalised around this information. At this stage, I believe this judgement is just a recent historical average for that ground, but the method of determining par may evolve.

I gather that the intention is to unveil more graphics around the use of WASP throughout the season, with the system fully up and running by the time of the international matches against England. It’s going to be interesting listening to what the commentators make of the WASP. Last Friday’s game wasn’t the best showcase, since when Auckland came to bat in the second innings, their probability of winning was already at 92% and quickly rose higher. It was fun, though, hearing the commentators ask Wellington captain, Grant Elliot, who was wired for sound while fielding, what he thought their chances were given that WASP had the Auckalnd Aces at 96% at that point. Grant's reply was lovely: "Sometimes even pocket aces lose". This is worth remembering when (as will inevitably happen), a team has a probability of winning in the 90s but still goes on to lose.

Doing Well by Doing Good: Sports Edition

New Zealand play Argentina in the Rubgy Championship again this weekend, so there will likely be more discussion of the role that the immediate past New Zealand coach, Graham Henry, has as a coaching advisor to the Argentinian team.  When the two teams met a couple of weeks ago in New Zealand, the media commentary on this focused on patriotism (how dare Henry work for the opposition), industrial espionage (there should be a stand-down period between coaching stints for different teams, since Henry still has information about current NZ structures), and social policy (it is good for the game to provide help to the less-strong teams).

In contrast, no-one seems to have considered the possibility that Henry's assistance to Argentina could be good for New Zealand. File this one under Honours problem sets I would like to write if I were teaching an appropriate course. The model is as follows:

The Rugby Championship is a two-round, round robin tournament (home and away) involving four teams: New Zealand, Australia, South Africa and New Zealand. New Zealand is clearly currently the strongest of the four teams and Argentina the weakest. The disparity is not so great that any result is a foregone conclusion, but realistically the gap between New Zealand and Argentina is large.  The biggest threat to New Zealand in the competition, then, is not the prospect that they might lose to Argentina. It is that they might split their two-game series with the other two teams, and have the competition decided by bonus points.

Helping out Argentina, therefore, would be to our advantage, if it raised the probability of their beating the other two teams by more than if it raised the probability of their beating New Zealand. I have no idea just what assumptions would be needed to make this model work, which is why I think it would make a great problem set. There might even be a letters-style publication here. I'll put co-authorship out for tender!

RWC losses

Such are the measures of success in hosting international sporting events: The Herald calls the 2011 Rugby World Cup a success for having lost the country only $31.3 million, "$8 million less than they expected." Alas, the article seems not to be online. But as most of the APNZ story seems to come from the IRB press release, you can probably just read that.

I'd be interested in seeing what went into that final "cost to the country" tally. Is it just the cash transfer from the government to the RWC? Local government outlays as well? Costs of diverting a substantial part of the Wellington bureaucracy to supporting the RWC? Stadium expenditures, like Dunedin's mess, where the RWC push was a pretty explicit part of the case for building it?

RWC Minister Murray McCully comments:

"Without a doubt, RWC 2011 will generate significant economic benefits for this country for many years to come."

Sam Richardson points to some different results in Manawatu:

Far from producing a windfall, predicted to be worth between $750,000 and $2.2 million to the city, economic growth actually slowed during last year's tournament.

Proponents of the city's involvement, which included two matches, were "overly optimistic", said economic policy analyst Peter Crawford, and some city councillors are asking whether hosting large events is worth it.

The estimates process got it so wrong because it did not balance the likely benefits against the costs, he said.

One of the costs was the extent to which such a major event crowded out other activities.

I'll look forward to seeing Sam's paper at the NZAE meetings.

HT: Hamish Keith

RWC Economics

I've been more than a bit sceptical about the benefit numbers postulated for the Rugby World Cup. But Sam Richardson has been watching things more closely than I've been. And, he's now blogging! He writes:

If the best case scenario eventuates, and the event costs the taxpayer $26m (that is, 2/3 of $39m), then to be economically justified, we should see additional economic benefits of at least $26m. Of course, as has been reported, the costs of the tournament to local, regional and central government are quite a bit larger than $$39m. Thus we should expect to see substantial benefits to make the tournament worthwhile. Will we? Time (and research) will tell.

I'll look forward to seeing Sam's updates. You don't necessarily need measurable economic benefits of $26m to make the spending worthwhile - if the joy experienced by hosting the event were sufficiently large, it could be justified as consumption expenditure. But we'd also want to tally the economic losses suffered by sectors that saw a drop in custom custom as people were scared off by rugby traffic. And we'd also want to be careful to compare the feel-good benefits of the RWC with the benefits we could have achieved through other spending, and to put some weight on the losses experienced not only by the sports atheists like me but also by those who like rugby but don't like the congestion, parades, and diversion of public amenities. Sam looks to the increase in spending with the tournament:

The net change in spending is where we see changes in things like the tax take (GST, etc), which are listed in the expected benefits from the tournament. Gross figures are all well and good, but they are very difficult to substantiate or refute. Literature on previous mega events pretty much says the same thing - that the realised economic impacts are highly likely to be significantly less than initial projections.

Further, if rugby tourists consume amenities costly at the margin or otherwise rivalrous, then GST revenues too are an overestimate of benefits.

Against spending on stadiums and events

I'm scheduled for Jim Mora this afternoon to chat about the economic benefits, or otherwise, in investment in mega-events like the Rugby World Cup. Here's some of the relevant literature for listeners there who want to check my sources:

• Zimbalist and Noll. "Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums". Brookings Institution, 1997. The book's key findings are summarized here. They come out strongly against such spending, noting that government investments in stadiums are regressive, with the main benefits going to rich folks (players, team owners). The key takeaway for NZ purposes:

  As noted, a stadium can spur economic growth if sports is a significant export industry—that is, if it attracts outsiders to buy the local product and if it results in the sale of certain rights (broadcasting, product licensing) to national firms. But, in reality, sports has little effect on regional net exports.
  
  Sports facilities attract neither tourists nor new industry. Probably the most successful export facility is Oriole Park, where about a third of the crowd at every game comes from outside the Baltimore area. (Baltimore's baseball exports are enhanced because it is 40 miles from the nation's capital, which has no major league baseball team.) Even so, the net gain to Baltimore's economy in terms of new jobs and incremental tax revenues is only about $3 million a year—not much of a return on a $200 million investment.

• Dennis Coates's work. he has a lot of papers out on the topic, but the main findings are summarized in this article in The American. Note that Brookings, above, is a top notch center-left think tank; AEI runs center-right. In one telling paper, he finds that strikes in professional sports leagues impose no economic cost on cities that have sports franchises; if the economic benefits of stadiums and sporting events are high, we'd expect serious losses. Instead, there's no effect. Others have found the same thing, or that effects are relatively small.
• John Crompton, "Economic Impact Analysis of Sports Facilities and Events: Eleven Sources of Misapplication". He lists some of the ways folks fudge the numbers when they want to purport that stadium spending confers large national benefits. It would be mildly interesting to run it as a tick sheet against benefit estimates for the RWC.
• Baade and Dye, "The Impact of Stadium and Professional Sports on Metropolitan Area Development".

  The evidence presented here is that the presence of a new or renovated stadium has an uncertain impact on the levels of personal income and possibly a negative impact on local development relative to the region. These results should serve as a caution to those who assume or assert a large positive stadium impact.

  See also Baade 1996
• Paul Walker's summary of the literature
• And of course Cowen's classic "Should Governments Subsidize Stadiums and Events?". He notes some of the big problems with benefit estimates.

As for this year's New Zealand Rugby World Cup, see these:

• Problems with the MasterCard study touting $1.2 billion in benefits.
• Sam Richardson's analysis of the economic benefits of RWC
• Why is the government subsidizing RWC broadcast bids?
• Are ticket revenues a national benefit? Only if the government is on the hook for deficits!
• Is consumer surplus sufficient reason for rugby subsidies?

Intervening for the surplus

Paul Walker asks whether consumer surplus can ever justify government intervention. Arguing against Sam Richardson's contention that consumer surplus from the Rugby World Cup can justify government intervention, Walker notes:

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

What's Walker missing? If there's a market failure preventing the realisation of potential consumer surplus. Imagine that the local folks putting together a bid for the RWC set up their bid optimally with respect to maximal extraction from those who could attend games: lots of tiered pricing, lots of tied sponsorship arrangements, lots of merchandising. And the bid were just shy of making it. And, suppose further that each and every Kiwi got $10 in warm fuzzies just from pride in knowing the event were here being held. If there's no market in which they can express their preference for the event's being held, and if the event wouldn't be held absent the contribution from those folks who'd never attend a game but who would enjoy benefits, then that can be an argument for government intervention.

Now, the warm fuzzies can be internalized through sponsorship arrangements: if those not attending the game get warm glow from the games, sponsors may capitalize on that warm glow. But we'll specify that the $10 per person is over and above any amount that can be capitalized on by sponsors.

In that case, you could argue for government involvement. You need a market failure of some sort to make the CS argument for intervention hold. It's not nonsensical on first principles. But it's rather unlikely that we've been made better off by the investment. Why?

First, we'd have to know that the potential CS made it worth the cost.

Second, we'd have to ask why alternative mechanisms for solving the coordination problem among those experiencing warm glow weren't attempted. KickStarter is an awesome mechanism for this. You put up your project and your required funding threshold; folks pledge money and are only called on for funds if the collective willingness to pay is high enough. Sure, there could be free rider problems, but there are ways of turning assurance contracts into dominant assurance contracts. If RWC never even bothered trying KickStarter and went instead immediately to the guys who can use guns to force your contribution, we might be sceptical that they really believe that there are net gains to the public (or that the latter is just easier for them).

Finally, we'd have to weigh up whether the losses from bearing the market failure - the forgone benefits - really justify the costs of intervention.

I'd put 20:1 against that the NZ government's investment in RWC meets any kind of sane cost-benefit analysis. There are states of the world in which such investments can be optimal; we're just rather unlikely to be in that world.

Rugby World Cup

I'm scheduled for Martin Devlin's show on Radio Live this afternoon to talk ticket scalping. If the econ department had ever had a vote on "most likely never to appear on a national sports programme", I'd probably have made the finals. Lack of knowledge about rugby probably helps me here though - I can make hypotheses behind the veil and see what the rugby expert says when I talk to him on the show.

Here are some things I want to know, and hope to find out this afternoon.

• What proportion of seats for the quarter-finals, semis and finals are allocated via the lottery rather than through the international pool?
  • The more that go through the lottery, the greater the potential revenue losses from underpricing and the greater the benefits of scalping
• What proportion of folks getting a lotto ticket will be invited to buy a finals ticket? Is it completely random draw, or is there some algorithm running in the background that tries to match folks up with the ticket they'd be most likely (or least likely) to want to get? Will we ever get stats on the number of lotto invitations extended and the proportion that were accepted?
  • The worse the match between the "invitation to buy" and the buyer's preferences, the fewer the number of acceptances we'll have. Consequences depend on what happens with the rejected invitations. If the stats never come out, that's probably not a good thing.
• Suppose I win the lottery but am given the chance to buy a ticket either for a game I don't want to see or for one that's more expensive than I'm willing to pay. What happens to the ticket I turn down? Does it go back into the lotto pool? Does it go into the set of normal-priced tickets or into the set for hospitality packages?
  • If it goes back into the lotto pool, potential losses are higher. If it goes to the international pool, where profits are higher, that reduces losses but also perhaps explains the bizarre lotto set up where you kinda think you've got a shot at a ticket, but you can't tell in advance for which game or at what price level. In this latter case, it strengthens support for my "the whole thing's a sham" hypothesis; in the former, it weakens it but also increases the benefits of scalping.
• Suppose I buy a ticket at regular prices for the semi-finals, but the team I wanted to see there gets knocked out in the quarter finals. I'm in deep despair; I can't leave the house, never mind go to see the team that kicked my guys out of the semi-finals. How can I sell my ticket without the buyer worrying that it's counterfeit? Is there any kind of legitimate resale market like StubHub or TicketExchange? If not, why not? The absence of one of these reduces the amount I'm willing to pay for the ticket in the first place in the same way that I'm willing to pay more for an airline ticket that allows cancellations.

Again, I'm behind the veil here. But suppose I were the RWC organizer and I were organizing things. How would I set it up if I knew I had to give the appearance of having some seats available at low price for regular Kiwis, but I wanted to minimize losses at the same time?

I'd run the lotto for lowish priced seats for the popular games. I'd make sure that people couldn't choose in advance what price ticket or what game they'd be offered the chance to purchase. I'd make it really hard for them to on-sell that ticket so they decline the offer [prohibit on-selling at higher than face value]. I'd then run a background algorithm that made it more likely that folks who bought the cheapest seats for games were given the chance to buy really expensive tickets that they probably couldn't afford - ideally in another city. So folks buying cheap tickets to games in Invercargill would get the option to buy expensive seats for final games up on the North Island. Then when they turned me down, I'd put those tickets into hospitality packs or make them available to international tour operators. Voila! It looks like locals have a fair go at tickets for the good games, but most of the seats actually wind up being sold at market prices.

Maybe Martin Devlin can tell me how close actual practice is to how I'd be doing things were I in that spot. Again - I want the lowest possible losses for RWC because the government's on the hook for it one way or another. If it's the case that the veneer of broad access is what maintains support for what's likely around a half a billion dollars in total combined subsidies for the world cup though - I'd sooner peel that veneer back a bit (if it is veneer).

Strange country, New Zealand. I do rather a lot of work on topics like alcohol, minimum wages, voter knowledge - all using NZ data in an NZ context - tumbleweeds roll by. Niko Kloeten from the NBR calls me up Wednesday morning asking for the standard econ view on ticket scalping. I emailed him a few paragraphs a half hour later. Got a call that afternoon for TVNZ's breakfast show that afternoon for the next morning, then Larry Williams's Newstalk ZB drivetime show Thursday afternoon, and now this.

Folks coming in from Devlin's show would probably find these sets of posts of interest. Each one will bring up the posts with those tags.

• Ticket scalping
• Sports economics
• Economics of stadiums
• The kinds of things I find fun (perhaps too nerd humour, who knows)
• The merits and economics of alcohol

Otherwise, hit the "greatest hits" links over at the top on the right to see the more typical fare here. And who knows. Maybe someday Seamus Hogan will start blogging here again, in which case you might expect more sports economics posts.

Update: Martin thinks the lotto tickets stay in the lotto pool if they're turned down. Would be interesting to know for sure.