Economics of the Final Four

March Madness is starting soon, with Conference Championships ending on Saturday and Selection Sunday coming the day after. The post-season NCAA tournament is good news for fans, great news for the 65 teams that compete, and fantastic news for CBS. But is it a good deal for the host cities of the Final Four?

The answer seems like it would be an emphatic “Yes,” but in the book The Economics of Sports (2004), Robert Baade and Victor Matheson argue that promoters overstate the economic benefits of the Big Dance. Accordingly, they maintain that in only two of the 48 men’s and women’s tournament finals before 2004 did the host city experience significant positive income growth.

In the separate Handbook on the Economics of Sports (2006), Baade again argues that the NCAA Tournament (along with other “mega-events” such as the Olympics, World Cup, Super Bowl, etc.) fails to generate the expected income because of costly government subsidies (such as stadium financing and infrastructure), security expenses, operating costs, and the likelihood that a counterbalance to the gross spending of visitors occurs when residents not attending the event decrease spending because of local price increases and their desire to avoid venue congestion. On top of that, multiplier analysis can be used to estimate the amount of money retained locally. In Economics of Sport and Recreation (2000)Chris Gratton and Peter Taylor estimate that only 20 percent of additional visitor expenditure is retained as additional local income.

On the flip side, it’s easy to see why cities line up to host the Final Four. Besides the public relations benefits and the opportunity to attract visitors who may be coming to the city for the first time, host cities also make real money. In 2006, Indianapolis hosted the Final Four and reported an economic impact of $40 million, not including direct spending from media or corporate sponsors.

Maybe this year San Antonio, the host of the 2008 Final Four, will strike it rich. But my guess is that when the dust settles and they’re counting media and visitor spending revenues, it might be harder than they think to balance their checkbook.