The Supply Constraint Problem in Economic Impact Analysis: An Arts/Sports Disparity

May, 2004


The major technical errors that can be made in traditional economic impact analysis are well understood by all but the most inexperienced practitioners.1 The three most common are demand-side errors: (1) the spending diversion direct base error (i.e. the failure to subtract local sources of funds and non-local uses of funds from subject organization or event budgets and other spending data sources), (2) the ancillary spending induced base error (i.e. incorrectly attributing all complementary good spending by non-local visitors to the existence of a particular subject organization or event, and (3) the indirect impact multiplier error (i.e. failing to adapt the multiplier to the specific sized region by not recognizing the commonly negative relationship between the size of the direct and induced spending bases and the relevant multiplier).2

However, even highly trained analysts do not as consistently avoid two other potentially significant problems. The first, which is the focus of this paper, is the failure to consider the severity of supply capacity constraints in the local economy that may generate as much as 100 percent crowding out or displacement of one type of visitor spending by another type of visitor spending. While this is focused on the alleged limitations of the hospitality sector and the local transportation and related infrastructure, it is more broadly linked to the potential inability of a local economy to significantly expand its output in response to alleged massive injections of visitor spending demands linked to “mega-events.”

The failure to detect this problem is in turn linked to an “ex post verification error” that results from the absence of empirical testing of regional economic impact projections, either due to inadequate data or motivation to test those results. Cultural economic impact studies have nearly ignored this problem, while recent sports studies have potentially overstated its significance.

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