The Olympic Effect - Andrew K Rose & Mark M Spiegel -2010

8/7/2019 The Olympic Effect - Andrew K Rose & Mark M Spiegel -2010

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TheOlympicEffectAndrewK.RoseandMarkM.Spiegel*

May14,2010

AbstractEconomistsareskepticalabouttheeconomicbenefitsofhostingmegaeventssuchastheOlympic

GamesortheWorldCup,sincesuchactivitieshaveconsiderablecostandseemtoyieldfewtangible

benefits. Thesedoubtsarerarelysharedbypolicymakersandthepopulation,whoaretypicallyquite

enthusiasticaboutsuchspectacles. Inthispaper,wereconcilethesepositionsbyexaminingthe

economicimpactofhostingmegaeventsliketheOlympics;wefocusontrade.Usingavarietyoftrade

models,weshowthathostingamegaeventliketheOlympicshasapositiveimpactonnationalexports.

Thiseffectisstatisticallyrobust,permanent,andlarge;tradeisover20%higherforcountriesthathave

hostedtheOlympics. Interestinglyhowever,wealsofindthatunsuccessfulbidstohosttheOlympics

haveasimilarpositiveimpactonexports. WeconcludethattheOlympiceffectontradeisattributable

tothesignalacountrysendswhenbiddingtohostthegames,ratherthantheactofactuallyholdinga

megaevent. Wedevelopapoliticaleconomymodelthatformalizesthisidea,andderivesthe

conditionsunderwhichasignallikethisisusedbycountrieswishingtoliberalize.

JELClassification:F19,L83

Keywords:trade,liberalization,megaevent,host,candidate,export;model,signaling,data

AndrewK. Rose(correspondence) MarkM. Spiegel

HaasSchoolofBusiness FederalReserveBankofSanFrancisco

UniversityofCalifornia 101MarketSt.

Berkeley,CAUSA947201900 SanFranciscoCA94105

Tel:(510)6426609 Tel:(415)9743241Fax:(510)6424700 Fax:(415)9742168

Email:[email protected] Email:[email protected]

* RoseisB.T. RoccaJr. ProfessorofInternationalTradeandEconomicAnalysisandPolicyintheHaas

SchoolofBusinessattheUniversityofCalifornia,Berkeley,NBERresearchassociateandCEPRresearch

fellow. SpiegelisVicePresident,EconomicResearch,FederalReserveBankofSanFrancisco. Wethank

ChristopherCandelariaforexcellentresearchassistance,andKeithHeadforhelpwithhistetradic

programs. Forcomments,wethank:AntonioCiccone,JohnFernald;ReuvenGlick;YuriGorodnichenko;PierreOlivierGourinchas;GalinaHale;DennisNovy;AssafRazin;GlennRudebusch;JayShambaugh;

BentSorensen;EricSwanson;LindaTesar;ShangJinWei;JohnWilliams;EricvanWincoop;two

anonymousreferees;andworkshopparticipantsatBerkeley,Copenhagen,FRBSF,NBER,Tsinghua,and

UCSD. Moreextensiveearlierandcurrentversionsofthispaperarepostedat

http://faculty.haas.berkeley.edu/arose,alongwiththerelevantdatasetsandsampleoutput. Theviews

presentedinthispaperarethoseofauthorsanddonotrepresenttheviewsoftheFederalReserveBank

ofSanFranciscoortheBoardofGovernorsoftheFederalReserve.


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WhentheOlympicflameislit,Chinawillbehopingfora17dayfestivalofsportandinternational

friendship. Itseesthegamesasmarkingnotjustitsreemergenceasaglobaleconomicforcebutalsoas

acountrythattherestoftheworldtreatswithadmirationandrespect.

Economist,August2,2008

1. Motivation

Economistsareusuallyskepticalofargumentsaboutthepublicprovisionofinfrastructurefor

sportingevents,andrightlyso. Agentsthatendorsetheconstructionofnewsportsstadiaorthestaging

ofmegaeventsusuallydosooutofnaivetyorselfinterest. Inpractice,theseeventsusuallyendup

imposinglargecostsontheirhoststhatarenotnearlycompensatedbyeithertherevenuesearned

duringtheeventorthelegacyoflargestadiaorobscurefacilities(velodromes,aquaticcenters,andso

forth)thatareleftbehind. Theopeningceremoniesofthe2008BeijingOlympicgamesarecommonly

thoughttohavecostatleast$100millionwhenover100millionChineselivedonlessthan$1/day.

Despitethefactthatmosteconomistsdoubtthewisdomofsuchpolicy,thereislittlequestion

thatcountriescommitsubstantialresourcestobecomecandidatestohostmegaevents,andmuch

moreshouldtheybefortunate"enoughtoactuallyhosttheevent.Whilethereisusuallyavocal

minorityofopponents,thedesiretohosttheOlympicgamesiswidelyheldbyboththemassesand

politicalelites.

Thispaperexaminesthepossibilitythatbothsidesoftheargumentmayberight. Inparticular,

weshowthatthereisalargeeconomicbenefitassociatedwithmegaevents(justifyingthepublic's

enthusiasm),despitethefactthatmuchoftherequisitenewinfrastructureisanetcost(explainingthe

skepticismofeconomists). Succinctly,whenacountrywishestoentertheworldstage,itcansignalthis

tobothdomesticandinternational constituenciesbyofferingtohostamegaevent. Wemodelthis

narrowlybyfocusingontradeliberalization,butbelievethatthepointmaybemoregeneral.

ItiscommonlyarguedthathostingtheOlympicswillpromoteanation'sexports. Forinstance,

theInternationalOlympicCommittee(IOC)believesthatpotentialvisitorswillbedrawntoOlympic

venuesafterbeingexposedtothemthroughthegames. Preuss(2004)discusseshowtheSeoulGames

in1988wereintendedtoimproveinternationalrelationsbetweenSouthKoreaandtheSovietBloc

countriesaswellasraiseinternationalawarenessofKoreanmanufacturedproductssoastopromote

Koreanexports. Wearedubiousofthepracticalrelevanceofthisargument,andthusbeginby

examiningitempirically,usinganumberofdifferentmodelsoftrade. Surprisingly,wefindstrongevidenceofalargepersistenteffectoftheOlympicsonbothexportsandoveralltrade. Ourresults

seemrobusttoabatteryofsensitivityexercisesincludingtetradicandmatching/treatmentestimation;

weshowthatcountrieswhichhavehostedthegamesseemtohaveexportsover20%higher,ceterisparibus. OthermegaeventssuchastheWorldCupalsohavelargepositiveeffectsontrade. Somewhat

surprisingly(atleasttous),countriesthathostamegaeventseemtorealizeaneconomicbenefitinthe


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formofgreateropenness. Ifopennessenhancesgrowth(e.g.,(Lucas,2009),thewelfareconsequences

ofmegaeventsmaybepositiveandlarge.

Whileourobservedeffectislargeandrobust,itmaybearguedthatitisattributableto

unobservabledifferencesbetweenthosecountriesthathostthegamesandthosethatdon't,rather

thanahostingeffect. Toaddressthispossibility,wecomparetradepatternsforcountriesthathostthegamestothosethatbidunsuccessfullyforthegames. Inusingthisalternativegroupasacontrol,

ourmethodologyfollowsalargerecentliterature,suchasGreenstoneetal(2008). Inourcase,the

operationalassumptionisthatsuccessfulandunsuccessfulcandidatesaresimilarintermsofproclivity

towardstradeandliberalization,differingonlybytheexperienceofactuallyhostingtheOlympicgames.

Usingthisidentificationstrategy,wefindthatcountriesthatwereunsuccessfulcandidatesfor

thegamesalsoexperienceapositiveexporteffect,onesimilarinsizetothatexperiencedbyactual

Olympichosts. Thesefindingscastdoubtontheideathataplausiblemotivationforhostingamega

eventisanychangeinacountry'sfundamentalsinducedbyholdingthegames(suchasconstruction

activityortheresultinginfrastructure). Instead,ourevidenceisconsistentwiththeconclusionthatallcountriesthatbidforthegamesexperienceanincreaseinoutwardorientation,notjusthosts.This

raisestwopuzzles. WhyshouldbiddingfortheOlympicsbeassociatedwithincreasedopenness? Andif

hostingthegamesbringsnotangiblebenefitsrelativetoacontrolgroupofunsuccessfulcandidates,

whywouldanycountryeverbidtoholdanexpensivemegaevent?

Weofferananswertothesepuzzlesbelow. Weexplorethepossibilitythatbiddingtohostan

internationalmegaeventsuchastheOlympicsispartofacostlystrategythatsignalstradeliberalization

andresultsinincreasedopenness. Wedevelopatheoreticalpoliticaleconomymodelconsistentwith

thisconjecture.Inthemodel,weobtainaseparatingequilibriumwherebiddingtohostamegaevent

providesapositivesignalaboutfuturepolicyintentions. However,consistentwithourempirical

findings,hostingthegamesinandofitselfhasnoimpactonanation'sfundamentalsortrade.

OurmodelalsosuggestsananswertothequestionWhyamegaevent?"asthechoiceofa

signalofliberalizationintentions.WefindthatcountrieswillbemorelikelytousetheOlympicsignal,

thegreateristheincidenceoftheexpectedcostofsendingthesignalonthegroupthatexpectsto

benefitfromfutureliberalization. MajorsportingeventsliketheOlympicsaretraditionallyfinancedby

therelevantcity(usuallythecapital)inconjunctionwiththecentralgovernmentofthehostcountry.

Policymakersfromthesegroupsarelikelytobenefitfromliberalization.Assuch,biddingforthe

Olympicsmayservewellasasignalbecauseitalignsthecostsandbenefitsofthesignal. Toour

knowledge,thisisthefirstmodelwherethedistributionalimplicationsofsendingthesignalinfluence

thedesirabilityofthesignalchosen. Olympicbidsarealsogoodsignalsofliberalizationbecausethey

arehighlyvisible,infrequent,andhavelongleadtimes.

2. LiteratureReview

2.1 MegaEvents


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Anumberofstudiessupportlocalsubsidizationofsportingevents;theyoftenpredictlarge

economicbenefits.Thisworkistypicallycommissionedandisnotintendedfortheacademicaudience,

butitisstillinfluential.ForexampleHumphreysandPlummer(1995)estimatetheshorttermeconomic

impacttoAtlantafromhostingthe1996gamestobe$5.1billion.

Morerigorousstudiesareskepticaloftheneteconomicbenefitsofhostingmegaevents;seee.g.,Owen(2005). Thecostsofholdingsucheventsseemconsiderable. Further,anyenduringbenefits

derivemostlyfrominfrastructureinvestmentsthatthehostcitycouldchoosetomakeindependentlyof

thegames. Muchofthespendingontheeventbylocalcitizensisasubstitutefromadifferentleisure

activityorconsumptiongood,ratherthantrueadditionalspending. Moreover,theprojectsassociated

withthegamestypicallyseemtobewhiteelephants,suchaspoorlyusedsportingfacilitiesassociated

withidiosyncraticOlympicsports,orhotelsandtransportationinfrastructurebuilttoaccommodatea

onetimepeakdemandofjustthreeweeks.

Somehavearguedthathostingsportingeventsyieldsanonpecuniaryfeelgood"benefitto

localcitizenswhoarefilledwithcivicpridefollowingamegaevent,eveniftheydonotattend.

However,theveryexistenceofthisintangiblespilloverisuncertain,letaloneitsmagnitude. Itseems

safetosaythatamajorityoftheprofessionconsidersitunlikelythatthesebenefitsjustifythelarge

publicexpendituresinvolvedinhostingsuchevents(e.g.Coates,2007).

2.2 InternationalSignaling

Theuseofinternationalsignalstoindicatefuturepolicytoprospectiveforeigninvestorshas

beendiscussedintheliterature. BartoliniandDrazen(1997)developamodelwheregovernmentswith

asymmetricinformationaboutfuturefiscalpositionssignaltheirexpectationsthroughcurrentpolicies

oncapitalaccountopenness. Opencapitalaccountsaremorecostlyforcountriesinpoorfiscal

condition,sothosecountriesthatexpecttobeingoodfiscalconditioninthefuturecansignaltheirprospectsinwaysthatcannotbeprofitablymimickedbycountriesthatexpecttofacefuturefiscal

difficulties.

Thesignalweconsiderbelowisofaburningmoney"type,notinformativeinitsownsense,but

informativeduetothefactthatsendingthesignalisonlyattractivetothesetofcountriesthatsincerely

intendtopursueliberalization. Inthissense,itissimilartothecostsofdelayinawarofattritionmodel,

suchasthatofthedelayedfiscalstabilizationinAlesinaandDrazen(1991). Otherstudiesgoeven

farther,e.g.Krugman(1998)andMukand(2006),whoarguethatcountriessometimespursuepolicies

thatareactuallyperverse,inanefforttoincreaseinvestorconfidence. Theirargumentisthatina

globalizedenvironment,policymakersmayfeeltheneedtopursuepoliciesthatwouldconfirmforeigninvestors'beliefsaboutwhatconstitutesgoodpolicy. Thesebeliefsmaybebiasedduetoherding

effects(e.g.Banerjee,1992)oralternativelybecauseinvestorsmaydrawincorrectinferencesabout

theirimpact. Asaresult,perversepoliciesmayhavesuchanadvantageintermsoftheirimpacton

agents'expectations,thatpursuingthemmaybesuperiortofollowingthepaththatwouldyieldthe

bestoutcomeintermsofdomesticeconomicfundamentals.


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Onequestionthatnaturallyarisesinthesetypesofmodelsiswhyoneformofsignalmightbe

preferredtoanother. WearguethatoneattributeofusingtheOlympicsasasignalistheincidenceof

thecostofsendingthesignalwithinthecountry. Inparticular,itislikelythatthecostofhostingthe

Olympicsisprimarilybornebythebenefactorsofthesignaledpolicychange,limitingthelossestothose

notfavoredbythepolicy. MegaeventsliketheOlympicsarealsoinfrequent,highlyvisible,andhave

longleadtimes,attributesthatlendthemselvestosignalsofliberalization.

3. TheOlympicEffectonTrade

Ifthedirecteconomicbenefitsseemtheoreticallydubious,andanyindirecteffectshighly

uncertain,thewillingnessoflocalandfederalgovernmentstoheavilysubsidizesportingactivitiesisa

mystery. Wenowtrytotacklethisissueempirically. Inparticular,wetakeseriouslytheargumentthat

hostingamegaeventprovidesvisibilitytoahostcountryandthusmaystimulateglobaldemandforits

exports.

3.1 SpecificationandData

Westartourinvestigationbyusingthewellknownandwidelyemployedgravity"modelof

internationaltrade(laterbelow,wecorroborateourresultsusingavarietyofdifferentapproaches. This

modelsbilateraltradeflowsbetweenapairofcountriesasafunctionofthedistancebetweenthetwo

countriesandtheireconomicmasses." Weaugmentthisempiricalspecificationbyaddingahostof

otherfactorsthatmightalsoaffecttheirtradeintensity. Weemploythefollowingspecification:

ln(Xijt)= 0+ 1ln(Dij)+ 2ln(Popit)+ 3ln(Popjt)+ 4ln(GDPpcit)+ 5ln(GDPpcjt)

+ 6CUijt+ 7Langij+ 8RTAijt+ 9Borderij+ 10Islandsij+ 11Areaij (1)

+ 12ComColij+ 13Colonyijt+ 14EverColij+ 15SameCtryijt

+ Summerit+ ijt

whereidenotestheexportingcountry,jdenotestheimporter,tdenotestime,ln(.)denotesthenatural

logarithmoperator,andthevariablesaredefinedas:

XijtdenotesrealFOBexportsfromitoj,measuredinmillionsofdollars,

Disthedistancebetweeniandj,

Popispopulation,

GDPpcisannualrealGDPpercapita,

Contisabinaryvariablewhichisunityifiandjsharealandborder,


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CUisabinarydummyvariablewhichisunityifiandjusethesamecurrencyattimetandzero

otherwise,

Langisabinaryvariablewhichisunityifiandjhaveacommonlanguage,

RTAisabinaryvariablewhichisunityifiandjhavearegionaltradeagreementatt,

Borderisabinaryvariablewhichisunityifiandjsharealandborder,

Islandisthenumberofislandcountriesinthepair(0/1/2),

Areaisthelogoftheproductoftheareasofthecountries,

ComColisabinaryvariablewhichisunityifiandjwerebothcolonizedbythesamecountry,

Colonyisabinaryvariablewhichisunityificolonizesjattimet(orviceversa),

EverColisabinaryvariablewhichisunityifievercolonizedj(orviceversa),

SameCtryisabinaryvariablewhichisunityifiispartofthesamecountryattimet(orviceversa),

isavectorofnuisancecoefficients,

SummerisabinaryvariablewhichisunityifihostedapostwarSummergamesatorbeforetimet,

andzerootherwise,

ijrepresentstheomittedotherinfluencesonbilateralexports,assumedtobewellbehaved.

Thisdatasetincludesannualobservationsbetween1950and2006(thoughwithmanymissing

observations)forsome196territoriesandlocalities(werefertotheseascountries"below). The

sourcesofourbilateraldataset,alongwithacompletelistofthecountriesthemselvesaretabulatedin

thelongerversionofthispaper.

WeestimatethisequationwithOLS,usingarobustcovarianceestimator(clusteredbycountry

pairdyads)tohandleheteroskedasticity. Throughout,weaddyearspecificfixedeffectssoastotake

accountofanytimespecificcommontrendsoreffects. Wealsoperturbthisspecificationintwo

importantways. First,weaddacomprehensivesetofdyadicspecificfixedeffects(i.e.,amutually

exclusiveandjointlyexhaustivesetof{ij}intercepts)toabsorbanytimeinvariantcharacteristicsthat

arecommontoapairofcountries. Second,weaddcomprehensivesetsofexporterandimporterfixed

effects(i.e.,setsof{i}and{j})totakeaccountofanytimeinvariantcountryspecificfactors.1 Wealso

showbelowthatourkeyresultsareinsensitivetotheuseofotherestimationstrategies.

Thecoefficientofinteresttousis . ThisrepresentsthepermanentexporteffecttheOlympic

EffectassociatedwithhavinghostedthepostwarSummerOlympicgames,holdingotherexport

determinantsconstantthroughthegravitymodel(wetryhardnottointerpretthesecoefficientsas

causal). ThehostsofpostwarOlympicgamesaretabulatedinAppendixTableA1.2

3.2 BenchmarkResults


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TheresultsofestimatingourdefaultspecificationarepresentedinTable1. Thedefault

estimatesaretabulatedinthethreecolumnstowardstheleft,whereresultsarepresentedforthree

differentsetsoffixedeffects(none,dyadic,andexporter/importer).

Beforewediscussthecoefficientofgreatestinteresttous,webrieflydiscusstheother

determinantsoftradeflows.Thegravitymodelseemstoworkwell. Itdeliverspreciselyestimatedcoefficientsthataresensibleandsimilartothoseestimatedbyothers. Forinstance, 1isconsistently

estimatedtobeeconomicallyandstatisticallysignificant;exportsbetweenapairofcountriesfallwith

distance(aspreviousresearchershavefound). Similarly,thesizeandsignificanceof3and 5indicates

thatlargerandrichercountriesbothtendtoimportmore. Exportsarelargerwhencountriessharea

money,language,tradeagreement,landborder,orcolonialheritage. Further,theequationsfitthe

(largelycrosssectional)datasetwell,explainingwelloverhalfofthevariationinexports. Whilethese

resultsarenotofdirectinteresttous,theydoreassureusthatourestimatesaregroundedina

statisticalconditioningmodelthatdeliverssensibleandsignificantresults.

Oncethestandardtradedeterminantsareaccountedforbythegravitymodel,isthereany

roomleftforapermanentexporteffectofhostingtheSummerOlympics? Somewhatsurprisingly(at

leastinitiallytous),theanswerisunambiguouslypositive. Considerthecolumnontheextremeleft

handsideofTable1;theestimateof ispositiveandstatisticallydistinguishablefromzeroatall

reasonablesignificancelevels. Further,theOlympicEffect"iseconomicallylarge;thepointestimateof

.33,takenliterally,impliesthatcountriesthathavehostedthesummergameshaveexportsthatare

permanentlyhigherbysome(exp(.33) 10= 39%! Thisisbig,broadlycomparableinourestimatesto,

e.g.,theeffectsofasharedregionaltradeagreement. Reassuringly,includingeitherdyadicorcountry

specificfixedeffectsdoesnotchangethekeyresultverymuch.

Thefourcolumnsattherightofthetableprovidefurthersensitivityanalysis,adding

combinationsofcountryspecificfixedeffectsinteractedwithlineartimetrends. Thisallows,e.g.,each

exporter(importer)tohaveitsowntrendgrowthrateofexports(imports),asidefromanyotherglobal

timeorothereffects. Thesmallestestimateof appearswhenweincludeexporterspecifictimetrends

andimporterspecificintercepts,buteveninthiscase,previoushostsoftheSummergameshave

exportssome(exp(.16)1=)17%larger.

Succinctly,countriesthathavehostedtheSummerOlympicgamesinthepastseemtohave

exportsthatarebotheconomicallyandstatisticallysignificanthigher,holdingotherthingsconstant;an

effectof20%seemsareasonablelowerbound. Understandingthisapparentlyimplausibleresultmore

deeplytakesuptheremainderofthepaper.

4. SensitivityAnalysis

4.1 RobustnessofPermanentEffect


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Arethe(surprisingly)stronglinkagesbetweenexportsandOlympichostsfragile? Orinstead,do

smallperturbationstotheexactsampleorchoiceofconditioningmodelhaveastrongeffectonthe

results? No. WeprovideabatteryofrobustnesschecksinTable2,whichisintendedtoreassurethe

skepticalreaderthatourresultsareessentiallyinsensitivetominorchangesintheexacteconometric

methodologyusedtoestimate . Eachoftherowsinthetablecorrespondstoadifferentsensitivity

check,whilethethreecolumnscorrespondtothedefaultthreesetsoffixedeffectsincludingtotheleft

inTable1. Weonlyreportestimatesforthecoefficientofinterest ;othercontrolsareincludedinthe

regressionsasappropriatebutnotreported.

ThefirstexperimentofTable2showstheresultswhenexportsfromitojarereplacedby

importsintoifromj. Thecoefficientsremainstatisticallylargeandpositive. Indeed,thepointestimates

are,ifanything,somewhatlargerthanthoseassociatedwithexports. ThisindicatesthattheOlympics

areassociatedwithanincreaseintheopennessofanOlympichost. Thegamesdonotseemtoactas

simpleexportpromotion,butareinsteadassociatedwithanincreaseintwowaytradebetweenthe

hostandtherestoftheworld.

Nextwechangetheempiricalmodelbystrippingdownthegravitymodelbyincludingonly

bilateraldistance,importerpopulation,andimporterincomeascontrols. However,ourkeyfindingof

strongpositive coefficientspersists. Thesameistruewhenweaddregionaldummyvariables,taken

fromtheregionalgroupingsfromtheWorldBank(sothattheyincludeonlydevelopingcountries). In

particular,weincludedummyvariablesfor:EastAsiaandthePacific;EuropeandCentralAsia;Latin

AmericanandtheCaribbean;theMiddleEastandNorthAfrica;SouthAsia;andSubSaharanAfrica. We

thensuccessivelydeleteobservationsfordevelopingcountriesfrom:LatinAmericaortheCaribbean;

Africa;Asia;ortheMiddleEast. However,ourresultsdonotseemtobesensitivelyonobservations

fromaparticularregionoftheworld.

Wecheckfurtherforsamplerobustnessbyselectivelydroppingdifferentsetsofobservations.

WefirstdropallobservationsforimportersthatareclassifiedasindustrialbytheIMF. Wethen

consideronlymiddleincomeexporters(usingthe2008WorldBankdefinitionofacountrywithreal

annualGNIpercapitabetween$976and$11,905),andthenonlymiddleincomeimporters. Wethen

dropsmallexporters(definingasmallcountryasonewithfewerthanamillionpeople),poorexporters

(thosewithrealGDPpercapitaoflessthan$1000perannum),smallandthenpoorimporters,andthe

intersectionofthesefoursets. Finallywecreateamorebalancedsamplebyrestrictingourselvestothe

47countrieswithrelativelycompletebilateraldata. Noneoftheserobustnesschecksshakesthe

confidencewehaveinourbasicresults;wefindanegativeandsignificanteffectofhosting,butonlyin

theabsenceoffixedeffects. Wethencheckthesensitivityofourresultswithrespecttotime. We

separatelydroplate(post2000)andearly(pre1960)observations;againthisdoesnotdestroyour

findings.

Wefinishupthisanalysiswithfivefurtherexperiments. First,weweightourregressionsbythe

logoftheproductofthecountrypairrealGDP. Second,wedropoutlierobservations,definedasthose

wheretheresidualisfar(morethan2.5standarddeviations)awayfromzero. Wethenredefineourkey

Olympicsregressorintwoways.First,weconstructavariablewhichis0ifneitherinorjhashostedthe


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Olympicsatorbeforetimet,1ifeitheriorjhashosted(atorbeforet),and2ifbothiandjhavehosted.

Thelastvariabledeliversinsignificantresultsforhostingthesummergameswhenfixedeffectsare

included;otherwise,ourresultsareinsensitive. Finally,weusetheGlickTaylorhistoricaldataset,which

includesbilateraltrade(butnotexport)datastretchingbackto1870.Usingthislongdatasetallowsus

toincorporateobservationsforcountriesthathavehostedthegamesatanypointduringthemodern

Olympiadera,notjustfromtheshorterpostwarperiod. However,ourfindingsremainresilient;

countriesseemtohavepermanentlyhighertradeflowsafterhavinghostedthegames.

Weconcludethatourresultsdonotseemtoresultfromsomesmallsubsetofthedataset,and

arerobusttoreasonablechangesinthesampleandexactspecificationofourempiricalmodel.

CountriesthathavehostedtheSummerOlympicgamesseemtohavehighertradethanothers.

4.2 Endogeneity

Aquestionarisesimmediately:CanthechoiceofvenuefortheOlympicgamesbetreatedas

plausiblyexogenous? Perhapsonlycountriesthatareopentotradearechosentohostthegames? We

attempttoaddressthispointmoredirectlybelowwithamatchingmethodologythatcomparesOlympic

hosts(astreatments)toothercountries(controls),andwealsopursueaneventstudyofrelevance.

Still,wenowmakeseveralpoints.

First,theendogeneitycritique(alongwithmuchofouranalysis)isprimarilycrosssectional,

whiletheempiricalfindingofrelevancetousisfoundinthetimeseriesbehavioroftrade.

Second,ouranalysisshowsthatcountriesbecomemoreopenaftertheOlympics. However,

cities(notcountries)bidtohostthegames. Indeed,fourAmericancitiesviedforthe1948Olympics

(whichwenttoLondon);fiveAmericancitiesappliedin1952(againwithoutsuccess),andsixin1956

(alsounsuccessfully).

3

Third,theIOCprovidesdetailsbothonhowitawardsthegamesandwhyacityshouldbe

interested. ThereisalonglistoftechnicalcriteriawhichareevaluatedbyanIOCcommittee;fewof

thesecriteriaarecloselyassociatedwithtrade. Informally,thereisalsogeographicbalancing,andthe

IOCseemstoawardperseverance(anumberofcitieshaveappliedrepeatedly). Wealsonoteinpassing

thatthereisconsiderablerandomnessinherentintheprocess.

Fourth,ourdatadoesallowustoconsidertheissueofreversecausalitydirectly.Inparticular,

wecanstatisticallyexaminewhethermoreopencountriesaremorelikelytobidfor,orobtainhosting

rightstotheOlympics. WeconductprobitteststothateffectinTableA2intheappendix. Inadditionto

includingopenness,wecontrolforcountrysizeandpercapitaincome. Wefindthatopennessenters

insignificantlythroughout,suggestingthatreversecausalityisnotanissue.

WhydoestheIOCthinkthatcitiesshouldbeinterestedinhostingtheOlympics? Theystate:

`Apartfromthesportingevents,themainreasonforapplyingforcandidacyliesinthepossibilitiesfor

economicdevelopmentandtourisminherentinsuchanevent. Forthisreason,andalsogiventhehigh

infrastructurecosts,onlyrichcountrieshavethemeanstomakeagoodreturnonsuchalarge

investment.4


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`Twomainreasonsseemtomotivatemostapplicantcities,namelyinternationalrecognitionandincreased

opportunitiesforinvigoratedurbanandregionaldevelopment. Indeed,thehostcityhopestotake

advantageoftheeventtomaximizeitsfacilitiesduetotheconsiderableincomegeneratedbytheGames,

andtogiveitselfanenhancedimagetoattractfuturevisitors,consumersandpotentialinvestors...

OrganisingtheOlympicGamesisafantasticadvertisingopportunityforthehostcity... Moreover,

organizingtheOlympicGamesisanopportunityforthehostcityandcountrytoshowtheworldtheirability

toundertakeandorganisesuccessfullysuchanimportantevent. Thispromotionalaspectisoften

motivatedbythepoliticiansofthehostcountry,therebyexplainingtheheavyinvolvementofnationalgovernmentsintheorganisationandfinancingofOlympicGames."

4.3 OtherInternational`Megaevents

WhiletheOlympicsarehighlyvisible,theyarenottheonlymegaevent. Doothereventsdeliver

similarresults? OneobviousalternativetoconsideristheWorldCup,theonlyseriouscompetitorwith

theOlympicsfortitleofmostimportantinternationalsportingevent.

LiketheOlympics,theFIFAWorldCupisheldeveryfouryears. Itbeganin1930inmuchthe

smallscalewayasdidthemodernOlympicsgame,withthirteen(mostlyLatinAmerican)countries

participatinginatournamentheldinUruguay. The1934and1938tournamentswerealsorelatively

smallandregional,beingheldinEuropewithlimitedparticipationbytheLatins. Theeventonlyreally

tookoffin1950(the1942and1946eventswerecanceledforWorldWarII). Thiswasdueinparttoa

conventionofalternatingtheeventbetweentheAmericasandEurope.5 Weconstructdummy

variablesforcountriesthathavehostedtheWorldCuppostwarinamanneranalogoustothoseforthe

Olympicgames,andaddthemtoourspecification. WereportourresultsinTable3a.

TheresultsofTable3aareintriguing. TheeffectofhostingtheOlympicgamesremainspositive

andstatisticallysignificantforallthreespecifications;thecoefficientscontinuetoaveragearound.2.

TheeffectsofhostingtheFIFAWorldCuparesimilarinsign,size,andstatisticalprecision. Indeed,wecanneverrejectthehypothesisofequaltradeeffectsofhostingtheOlympicsandtheWorldCup.

Whataboutinternationaleventsthatdonotinvolvesports? Afterall,internationalexpositions

andworld'sfairshaveanolderpedigreethanthemodernOlympics,stretchingbackatleasttothe1851

GreatExhibitioninLondon'sCrystalPalace. Thedeclineofinternationalcommunicationand

transportationcostshaslargelymadeworld'sfairsobsolete,andtheyhavedeclinedinimportanceand

numberthroughoutthepostwarperiod(Expo67inMontrealiswidelyconsideredtobethemost

successfulexpoeverheld). Still,Table3baddscomparablyconstructedbinaryvariablesfor(twenty)

postwarexposandworld'sfairstoourdefaultspecification. Inallspecifications,thetradeeffectof

hostingaworld'sfairorexpoispositiveandstatisticallysignificant,thoughitissmallerthantheOlympiceffectontrade.

Thereseemtobeanumberofwaysinwhichacountrycanenhanceitstradebyhostingan

internationalmegaevent. ThetradeexpandingeffectsofhostinganeventliketheOlympicsseemtobe

large,andtheyarebroadlycomparabletothoseassociatedwithhostingtheFIFAWorldCup. Holdingan

expoorworld'sfairalsoseemstohavemuchthesameeffect. Givenourinitialdoubtsconcerningthe

benefitsofhostingamegaevent,wenowdiveintotheissuemoredeeply.


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10

5. UnsuccessfulCandidates

ItisdifficultforustobelievethathostingtheOlympicsactuallyhassuchalargeeffectontrade,

letaloneonethatenhancestradepermanently. Yetoursensitivityanalysisshowsthatourresultsare

sturdy.

Wenowtakeaskepticallookatourresultsfromadifferentangle. Toestimatetheeffectsof

theOlympicsontradeintheprevioussection,ourstatisticalmodelcomparedhostswithnonhosts.

Thisseemsareasonablestrategy,sincenotallcountrieshavehostedthegames(sothereiscross

sectionalvariation),andthecountriesthathosttheOlympicsdosoatdifferentpointsoftime(sothere

istimeseriesvariation). However,itmaybethatourregressionresultsareimplicitlycomparingapples

withoranges;countriesarenotrandomlychosentohosttheOlympics. Onewaytogetatthisissueisto

comparethetradepatternsofhostcountrieswiththosethatbidunsuccessfullyforthegames. Werefer

tothelatterasunsuccessfulcandidatecountries;candidatesaretabulatedinAppendixTableA1. Our

implicitassumptionincomparingthetradeeffectsofOlympichostingandcandidacyisthatfailed

candidaciesformavalidquasiexperimentalcounterfactualcontrolgroupforOlympichosts(afterthe

inclusionofotherconditioningvariables).

InTable4a,wereportresultswhenweaddasetofbinaryvariablesforcountriesthatwere

unsuccessfulcandidatestohosttheOlympics. Thesehavebeenconstructedinthesamewayasour

hostdummyvariables. Forinstance,Londonwasawardedthe1948summergames,sothesummer

hostvariableisunityforallBritish(export)observationsfrom1948throughtheendofthesample.

SinceLausannewasanunsuccessfulcandidateforthe1948games,allSwissobservationsfrom1948

alsotakethevalueofunityforthecomparablesummercandidatevariable. Wetabulateseparate

exportestimatesfor:a)beinganunsuccessfulOlympiccandidate;andb)actuallyhostingthegames.Intriguingly,alltheeffectsthatis,boththehostandthecandidatecoefficients aresignificantly

positive. Indeed,asthetestsatthebottomofthepanelshow,theyaresimilarinsize;thehypothesis

thathostandcandidateeffectsareequalcannotberejectedatthe1%confidencelevel(thoughitcan

beatthe5%levelfortwoofthethreecases,oncebecauseofalargerhostingeffect,andoncebecause

ofasmallerhostingeffect). Table4busesnarrowsthesetofunsuccessfulbeingcomparedtohosts;

onlytherunneruptotheactualhostchosenisused. Theresultsremainquiteconsistentwiththeidea

thatthehostingeffectontradeissimilarinsizetothatofbeinganotherwisesimilarbutunsuccessful

candidatefortheSummerOlympics.

5.1

Timing

of

the

Olympic

Effect

and

Exports

ThestatisticalanalysisofTable4indicatesthatbiddingtohosttheOlympicsseemstohavean

exporteffectcomparableinmagnitudetothatofhostingthegames. Weexplorethisresultfurtherin

Figure1,whichportraystheexporteffectsofbiddingfortheSummerOlympics,eithersuccessfullyor

unsuccessfully,inaneventstudy. InsteadofusingasingledummyvariabletoshowthepostOlympic

hostingeffectontrade(asinTables14above),weuseanunrestricteddistributedlagmodel,sothat

thelaggedimpactofbiddingforthegamesisallowedtovarydependingonthenumberofyearsbefore


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11

orsincethebid. Sincebidstohostthegamesaretypicallysubmittedsevenyearsbeforetheactual

games,wemarkthesubmissionofbidswithaverticalline,andconsiderobservationsuptotwenty

yearsbeforeandfortyyearsaftertheactualgames. Wecontrolforothertradeeffectsthroughthe

gravitymodel(employedabove),portrayresultsforthreedifferentsetsoffixedeffects,andshowthe

coefficientsinthedistributedlagmodelalongwitha+/ twostandarderrorconfidenceinterval.

Exportsseeminsignificantlydifferentforbiddersandnonbiddersupuntilthetimethetimeof

theOlympicbid. Butafterthebidandbeforetheactualgamesexportsseemtorisesignificantly.

ExportsforOlympicbiddersremainsignificantlyhigherfordecadesafterthegames;theexactsize

dependsonthespecificationofthefixedeffects. Thiseffectdoesnotstemsimplyfromhosting;Figure2

isananaloguetoFigure1,butexaminesonlyunsuccessfulbidsforthegames. Thesimilaritybetween

thetwofiguresisstriking;inbothcases,theexporteffectstartsaroundthetimeofthebid,risesbefore

theactualgames,andappearstobeahighlypersistenteffect.

Thisisanintriguingresult,onewhichwefindreasonablyconsistentlythroughoutour

investigation. Itimpliesthatthe(sizeable)effectontradeseemstocomenotfromactuallyhostingthe

gamesbutfrombeingacountrythatbidsforthem. Moregenerally,signalingthatthecountryis

capableandwillingtohosttheOlympicsthroughahighlyvisibleinternationalbidforamegaevent

seemstobeassociatedwithasizeabletradeexpandingeffect. Indeed,theeffectofsendingthissignal

seemsbroadlycomparableinsizetoactuallyhostingthegames. Thisisconsistentwithourviewthat

anydirecttradeeffectofhostingthegamesissmall. Moreover,itsuggeststhattheobservedeffectsof

hostingamegaeventdonotseemtostemfromabigpush"typeofprocess[e.g.Murphyet.al.(1989).

Wedismissasimplausibletheideathateconomicfundamentals(e.g.,transportinfrastructure)relevant

fortradehavebeenimprovedbybothhostsandunsuccessfulcandidatesalikeduringtherunuptoa

seriousOlympicbid.6

6. FurtherRobustnessChecks

Inthissection,wemovebeyondtheconventionalgravitymodelandbrieflysubjectourresults

tothreefurthersensitivitytests. Givenourinterestinestimatingandcomparingthetradeeffectsof

bothhostingandbiddingforamegaeventliketheOlympics,wehavethreeparticularconcerns;a)

econometricissuesassociatedwiththegravitymodel;b)econometricissuesassociatedwithselection

biasandendogeneity;andc)thepresenceofourfindinginmultilateraldata.7

6.1 Tetradicestimates

Webeginbydealingwiththeproblemthatgravitymodelslikeoursmaybemisspecified

becauseofmonadic"problems. Theserefertoomittedfactorsthatarespecifictoasinglecountrybut

mayvaryovertime,suchasthoseassociatedwithmultilateralresistance"totrade,e.g.Andersonand

vanWincoop(2003). Todealwiththeproblem,weadoptthemethodoftetrads"advocatedbyHead

etal(2010).Withthismethod,consistentestimatorsofthecoefficientsofinterestcanbeattainedinthe

presenceofmultilateralresistancebycomparingexportobservationstoexportsforapairofbase


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12

countriesforthesameyear(thetechniqueistetradicsinceonecomparestradeflowsforfour

countries). Thismethodavoidsthelargenumberofcoefficientestimatesthatwouldberequiredto

estimatethemonadiceffectsusingamoreconventionalfixedeffectsmethod,butdoesnoteither

infeasiblecomputationaldemandsornonlinearestimation;Headet.al(2010)providemoredetails.

Oneissuethatarisesintetradicgravityspecificationsisthedesignationofthebasecountries.Toensurethatourresultsarerobust,weusethreedifferentpairsofbasecountries:a)theUnitedStates

andtheUnitedKingdom;b)JapanandFrance;andc)GermanyandCanada. Asecondissueisthatthe

errortermsinourtetradsarelikelytobecorrelated,aserrortermsforindividualcountriesappear

repeatedlyacrossobservations.WethereforeusethemethodologyofHeadet.al(2010)tocorrectour

standarderrorestimates. Finally,thisestimationtechniquerequiresvariationacrossbothdyadsand

time,sothatthedummyvariableweusedforTable1isinadmissible;wesubstituteinsteadadummy

whichis0ifneitherinorjhasbidfortheOlympicsatorbeforetimet,and1ifeitheriorjhas.

OurresultsarereportedinTable5.Itcanbeseenthatwecontinuetoobtainpositiveand

statisticallysignificanteffectsofeitherhostingorcandidacyfortheOlympics,regardlessofourchoiceof

basecountries;ourpointestimateare,ifanything,implausiblylarge.

6.2 Matching:aTreatmentMethodology

Wenextuseatreatmentmethodology,comparingexportsforeithertreatedhostsor

candidatecountriestoexportsfortheirmatchedcontrolcounterparts. Candidateandhostcountries

fortheOlympicgamesarenotrandomlyselectedfromoursample;insteadtheychoosewhetherto

submitabidornot. Thusthereisthepossibilitythatourresultslargelyreflectselectionbias;usinga

matchingtechniqueallowsustohandlethisproblemmoreeffectively. Wematchobservationsusinga

stratificationtechnique. Ourvariablesusedformatchingcountrypairyearobservationsincludethe

logsof:distance,exporterandimporterpopulations,exporterandimporterrealGDPspercapita;anddummyvariablesforsharingacommonlanguageorborder.

Wedotwokindsofmatching:a)wematchactualOlympichostcountriestocandidates;andb)

wematchtheunionofhostsandcandidatestononcandidates. Ifhostandcandidatecountries

experiencesimilartradeboosts,weexpectthefirstexercisetoleadtosmalldifferencesinexports. If

biddingforamegaeventiskey,weexpectthesecondexercisetoresultinlargetradeeffects.

Ourresults,alongwithbootstrappedstandarderrorestimatesareshowninTable6. Wefind

thathostsoftheSummerOlympicsexperienceasmallincreaseinexportscomparedwithcandidatesfor

thegames.Thiseffectisstatisticallysignificantata5%(butnot1%)confidencelevel. Theseweak

resultscontrastwiththosewhichcomparehostsandcandidatestononcandidatecountries. Bidders

experienceaconsiderabletradeboostcomparedwithnoncandidates. Theseeffectsareeconomically

large(exportsrisebyabout20%)andaresignificantatthe1%confidencelevel.8

6.3 Multilateraldata


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13

Asafinalrobustnesscheck,weexaminetheeffectofhostingorbeingacandidateforthe

Olympicsontheaggregateexport/GDPratio;wealsoconsiderbeingaWorldCuphost. Wedothisby

simplyregressingmultilateraldata(sothatanobservationisforaparticularcountryandyear)onthe

Olympicdummies.Toaccountforotherdeterminantsoftradeasafractionofoutput,wealsocontrol

forthelogsofpopulation,realGDPpercapita,andincludecountryfixedeffects(yeareffectsareadded

assensitivityanalysisinanothercolumn).

OurresultsareshowninTable7. WefindthatcountrieswhichhavehostedtheOlympicshave

tradeapproximately15%(=exp(.14)1)higher,otherthingsbeingequal. Weobtainasimilarbutslightly

largeeffectforunsuccessfulcandidacy;thiseffect(unlikethehostingeffect)issignificantlyabovezero

atconventionalconfidencelevels. Allinall,ouraggregateresultsmirrorthoseaboveinthesensethat

wecannotrejectthehypothesisthatthecoefficientestimatesonhostingandcandidacyarepositiveand

equivalent. Finally,wealsoobtainsimilarpositiveandstatisticallysignificantcoefficientestimatesfor

havinghostedtheWorldCupinallofourreportedregressions.

7.ASignalingModel

7.1Setup

OurresultssuggestthattheOlympiceffectontradeinthedataisnotassociatedwithhosting

thegamesbutratherwithbiddingforthem.Inthissection,wedevelopapoliticaleconomysignaling

modelconsistentwiththisresult.Ourmodelisofthe``burningmoney"type. Weassumethatcountries

thatintendtopursueliberaltradepoliciesinthefuturecansignalthisintentbyengaginginthecostly

activityofbiddingtohosttheOlympicGames.Thepayoffforsendingthissignalisthatcountrieswhich

expecttoliberalizereceiveincreasedinvestmentintheexportsector(thesectorwhosepricesareraisedbyliberalization).Underappropriateparameterconditions,weobtainaseparatingequilibriumwhere

countriesthatchoosetoliberalizealsochoosetobidfortheOlympics;thosethatprefertoremain

closedneithersendthesignalnordotheyliberalize.

Weintroduceatwosectorspecificfactorsmodelofasmallopeneconomyinwhich

liberalizationincreasespricesintheexportsectorandlowersthemintheimportcompetingsector.

Nationalgovernmentsdifferinthedegreetowhichtheyvaluegainstotheexportingsector,andwe

assumethattheycannotcrediblyrevealthesevaluationstopotentialinvestors.Thegovernmentineach

countrymakesadiscreteliberalizationandsignalingdecisionbasedonitsexpectationsconcerningthe

impactofliberalizationonitsutility.

Bothsectorsoftheeconomyproduceusingafixeddomesticfactor,whichcanbeconsidered

sectorspecificcapital.Puttycapital, k,ismobileacrosssectorsandearnsaninternationalmarketrate

ofreturn,whichisfixedat *r .9 Realoutputlevelsintheexportandimportcompetingsectorssatisfy

jy k ,where ' 0jy and " 0jy , , j x m .Forsimplicity,weassumethatallputtycapitalis

importedbydomesticentrepreneurs,whohaveclaimsonthefixedfactorsandearnanyresidualprofits

fromoperations.


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14

Asthecountryissmall,ittakesworldpricesasgiven.However,domesticpricesareafunctionof

thegovernment'sliberalizationdecision.Liberalizationraisespricesintheexportsectorandlowers

themintheimportcompetingsector. Priceswhilethenationisclosedtoexternalmarketsaredenotedc

xp andc

mp ,whileafteropeningtheyareo

xp ando

mp respectively,whereo c

x xp p ando c

m mp p .

Thetimingofthemodelisasfollows:First,thegovernmentdecideswhetherornottosubmita

bidtohosttheOlympics. Next,theprivateagentsmaketheirinvestmentdecisions,basedontheir

expectationsofthegovernment'sliberalizationdecision. Finally,thegovernmentmakesits

liberalizationdecision,thewinningOlympicshostisnamed,andthepayoffsaredetermined.

Toensuresubgameperfection,wesolvethemodelbackwards. Subsequenttoreceivingthe

government'ssignal,foreignputtycapitalisinvestedineachsectortoequatethevalueofmarginal

productinthatsectortotheworldinterestrate,suchthat,

* *( ) = (1 ).

l l

j j j p y k r (2)

where*; , , ,

l

jk j x m l c o representstheequilibriumamountofputtycapitalallocatedtosector j .

Since*/ '/ " 0; ,

j j jdk dp y p y j x m itfollowsthat* *c o

x xk k and* *c o

m mk k .

Giventhatthegovernment'sliberalizationdecisionconfirmsinvestorexpectations,thereturnto

thedomesticentrepreneursineachsector,l

j ,satisfies

* * *1 .l l j j j j j p y k r k (3)

Itiseasytoshowthatthereturnintheexport(importcompeting)sectorisgreater(lower)under

liberalization.10

Weassumethatthereputationcostofbeingawardedthegamesandbackingoutisprohibitive.

Assucheachnationexpectstohostthegamesconditionalonbeingawardedthem.11

Let h representthecostofhostingtheOlympics,netofanynonpecuniarybenefitofhosting

thegames,suchasnationalpride. Let representtheprobabilitythatacandidatewillbeawardedthe

righttohostthegamesconditionalonhavingsentthesignal.Theexpectedcostofsendingthesignalis

thereforeequalto h . Thegovernmentfinancesthecostofsendingthesignalbyimposingalumpsum

taxoneachsector,wheretheexportsectorpaysashare ofthecostofsendingthesignal, h ,and

theimportcompetingsectorpaystherest, 1 h .

Thegovernmentisassumedtohaveautilityfunctionthatisconcaveinearningsfromeach

sector.Thegovernment'sutilityfunctionisassumedtosatisfy


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15

= ( ).g j j

j

U u v (4)

where 0, 0u u ,and , j x m .12Forsimplicity,wenormalizebysetting =1m ,anddefine

x asthemeasureofthedegreetowhichgovernmentutilityfavorstheexportsector.Weassume

thatthereisacontinuumofheterogeneouscountries [ , ] z z z ,whereahigherzindicatesahigher

valueofz

,thevalueofheldbythegovernmentofcountryz .Weassumethatz

issymmetrically

distributedontheinterval[ , ] withmeanvalue1.Fornotationalsimplicity,wedropthez

superscripts.

Priortosendingthesignal,gU thensatisfies

= ( ) ( ).c c

g x mU u v u v (5)

Aftersendingacrediblesignalandliberalizing,governmentutility, gU ,satisfies

= ( ) ( (1 ) ).o o

g x mU u v h u v h (6)

7.2 Equilibrium

Anequilibriumisasetofsignalandliberalizationdecisionsbyeachgovernmentthatmaximizes

itsexpectedutility,alongwithasetofinvestmentdecisionsinthetwosectorsconsistentwith

maximizingthereturnstothedomesticentrepreneurs,conditionalonthesignalofthegovernment.

Inanearlierversionofthispaper[RoseandSpiegel(2009)],wedemonstratethatthechangein

governmentutilitywithliberalizationismonotonicallyincreasingin.Define * asthevalueof z

whichleavesthegovernmentindifferentbetweenstayingclosedandnotsendingthesignal,and

sendingthesignalandliberalizing.Byequations(5)and(6),* satisfies

* ( ) ( (1 ) )=

( ) ( )

c o

m m

o c

x x

u v u v h

u v h u v

(7)

Wenextderivetheconditionsnecessarytoruleoutoffequilibriumpathoutcomes,wherethe

signalsentbythegovernmentfailstomatchitssubsequentliberalizationdecision.Let*

( )c c o

j j jv v k

( = , ) j e m representthevalueofrevenuesinsector j consistentwiththeoffequilibriumpathstrategy

ofsignalingliberalizationandthennotliberalizing,i.e.withcapitalconsistentwithliberalizationbut

pricesconsistentwithremainingclosed. Asshowninthelongerversionofthispaper,asufficient(but

notnecessary)conditiontoensurethatthisstrategyisnotchosenis

.c c

x xv v h (8)


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16

Thisrestrictionrequiresthattheearningsoftheexportsectorwithoutliberalizationarehigherwhenthe

governmentdoesnotsendthecostlysignal.

Similarly,let*

( ); = ,o o c

j j jv v k j x m

represent i.e.thevalueofrevenuesinsector j consistent

withnotsignalingliberalizationandthenliberalizing.Asufficient(butnotnecessary)conditiontoensure

thatthisstrategyisnotchosenis

.o o

x xv h v (9)

Thisrestrictionrequiresthattheearningsoftheexportsectorwithliberalizationarehigherwhenthe

governmentsendsthe(costly)signal.Combined,theserestrictionsimplythatrevenuesintheexport

sectorarelowerunderbothoffequilibriumpathstrategies.

Giventheserestrictions,weobtainourfirstproposition:

Proposition1Thereexistsaseparatingequilibriumwherecountrieswith *z sendthesignalandliberalize,andcountrieswith *


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17

liberalization;andthemarginalutilityoftheimportsectorafterliberalization.Theentiretermwillbe

negativeifandonlyif

* [ (1 ) ].

[ ]

o

m

o

x

u v h

u v h

(11)

Condition(11)requiresthat* (therelativevaluationofexportearningsheldbythe

governmentthatisjustindifferentbetweenliberalizingandnotliberalizing)islessthanorequaltothe

marginalrateofsubstitutionbetweenpostliberalizationearningsintheimportcompetingandexport

sectors.Intuitively,thisimpliesthatrelativeearningsintheimportcompetingsectoraresufficientlylow,

evenafteradjustingfortherelativeweightplacedonexportearnings(* ).Forexample,inthe

benchmarkcasewherethegovernmentvaluesearningsineachsectorequally*

( =1) ,thecondition

willbesatisfiedifearningsnetofexpectedsignalingcostssubsequenttoliberalizationarelowerinthe

exportsectorthanintheimportsector.

Giventhiscondition,weobtainoursecondproposition:

Proposition2Givenaseparatingequilibriumforallcountries [ , ] z z z ,andsatisfactionofcondition(11),anincreasein reduces * ,raisingthesetofcountriesthatchoosetosendthesignalandliberalize,whileif(11)isviolated,anincreasein increases * .

Theprooffollowsdirectlyfromequations(10)and(11).TheintuitionbehindProposition2liesin

thefactthatincreasesin improvethealignmentbetweenthecostsandbenefitsfromliberalization.

Thismayfavortheuseofbiddingfortheolympicsasasignalofopennessintentions.Thecosts

ofhostingtheGamesaretraditionallybornebythehostcity(usuallythecapital)inconjunctionwiththe

centralgovernmentofthehostcountry.Policymakersfromthesegroupsarelikelytobenefitfrom

liberalization.Intermsofourmodel,``megaevents"liketheOlympicsmaybehigh signals.

Tosummarize:ourmodelsuggeststhatcountrieschoosetobidforamegaeventinorderto

signalinvestorsabouttheirfutureliberalizationintentions.Undercertainparameterconditions,

governmentsthatwishtoliberalizecanprofitfromsendingthecostlysignalofbiddingtohostthe

games,whilethosethatdonotwishtoliberalizedonot;aseparatingequilibrium.Moreover,the

conditionsimplythattheprobabilityweightedcostofholdingtheOlympicsmustbesufficientlylargeto

dissuadegovernmentsthatdonotwishtoliberalizefromsendingafalsesignal.Thismotivatesthe

choiceofacostlymegaeventasasignalofliberalizationintentions.

Further,themodelalsodemonstratesthatdistributionalimplicationsmatter;theincidenceof

thecostofthesignalhasanimpactonitsdesirability.Thesignalmustbesufficientlycostlytotheexportsector,thesectorthatwouldbenefitfromthepolicychange,notjustcostlytothenation.Also,ifthe

governmentdoesnotfavortheexportsectortoogreatly,andliberalizationhassufficientdistributional

consequences,anincreaseinshareofexpectedcostofhostinggamesbornebytheexportsector


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18

increasesthemarginalgovernment'swillingnesstobid.Thatis,thehigheristheexpectedburdenof

hostingtheOlympicsontheexportablesector,themoreattractiveisbiddingforamegaeventasa

signalofliberalization.

8. Conclusion

InJuly2001,BeijingwasawardedtherighttohosttheGamesoftheXXIXOlympiad. Justtwo

monthslater,ChinasuccessfullyconcludednegotiationswiththeWorldTradeOrganization,thus

formalizingitscommitmenttotradeliberalization. Noristhisaonceoffcoincidence. Romewas

awardedthe1960gamesin1955,thesameyearItalystartedtomovetowardscurrencyconvertibility,

joinedtheUN,and,mostimportantly,begantheMessinanegotiationsthatleadtwoyearslatertothe

TreatyofRomeandthecreationoftheEuropeanEconomicCommunity. TheTokyogamesof1964

coincidedwithJapaneseentryintotheIMFandtheOECD. Barcelonawasawardedthe1992gamesin

1986,thesameyearSpainjoinedtheEEC;thedecisiontoawardKoreathe1988gamescoincidedwith

Korea'spoliticalliberalization. ThecorrelationextendsbeyondtheOlympics;the1986WorldCupwas

heldinMexicocoincidentwithitstradeliberalizationandentryintotheGATT.13 Inthispaper,wemodel

thislinkagebetweenmegaeventsandliberalizationboththeoreticallyandempirically.

ThemotivationforhostingamegaeventliketheOlympicsseemselusivetoeconomists.

Plausiblymeasuredneteconomicbenefitsarerarelylargeandtypicallynegative;claimsofnon

economicbenefitsaredifficulttoverify. Yetinpracticecountriescompetefiercelyfortherighttohost

suchevents. Why? Thispaperidentifiesonepotentialexplanation;countriesthathostthegamesenjoy

asubstantivepermanentincreaseintrade the``OlympicEffect." Similarincreasesinopennessare

observedforcountriesthathostothermegaevents,suchastheWorldCupand,untilrecently,World's

Fairs. Foracountrypursuingatradeorienteddevelopmentstrategy,suchanoutcomewouldclearlybeattractive.

OurempiricalresultsshowthattheOlympiceffectisrobust;hostingthegamestendsto

increaseacountry'sopennesssubstantivelyandpermanently. Butwenotbelievethathostingthe

Olympicshasanactualcausaleffectontrade;whilehostingthegamesissufficienttoboosttrade,itis

notnecessary. Inpractice,wefindthatcountriesthatbidfortheOlympicsunsuccessfullyalso

experienceaboostintrade,comparabletothatreceivedbyactualOlympichosts. Thisfindingimplies

thattheOlympicEffectontradedoesnotstemfromachangeineconomicfundamentals,causedbythe

activityorinfrastructureassociatedwithhostingtheOlympics. Instead,ourempiricalfindingssuggest

thatbiddingfortheOlympicsisacostlypolicysignalthatisfollowedbyfutureliberalization. Weexplorethisconjectureinapoliticaleconomymodel,wheregovernmentschoosewhetherornottosignalfuture

liberalizationbyhostingamegaeventliketheOlympics. Wederivetheconditionsforaseparating

equilibrium,whereonlycountriesthatvalueliberalizationchoosetosendthesignalandliberalize. Our

modelalsosuggeststhatthesizeanddistributionalconsequencesofthistypeofsignalmayinfluenceits

desirability.


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19

Weclosewithanumberofcautions. First,ourmodelmakesnoclearstatementonthemeritof

publicsupportforhostingmegaevents. Second,thereareothermotivationsforhostingmegaevents

whichwehavenotmodeled;forinstance,ourtheorycannoteasilyexplainthebehaviorofcountries

thatsubmitrepeatedormultiplebidsforlargesportingevents,orwhyopeneconomiesbidformega

events. Finally,othersignalsofandroutestoliberalizationexist,andouranalysisdoesnotexaminethe

relativeeffectivenessofthesepaths;weleavesuchissuestofutureresearch.


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Table1:PermanentEffectofOlympicsonLogExportsinGravityModelSummerOlympicsHost .33**

(.04)

.24**

(.03)

.30**

(.04)

.19**

(.04)

.16**

(.04)

.34**

(.03)

.35**

(.04)

LogDistance 1.12**

(.02)

n/a 1.33**

(.02)

1.26**

(.02)

1.31**

(.02)

1.14**

(.02)

1.32**

(.02)

LogExpPopulation 1.07**

(.01)

.19**

(.06)

.25**

(.06)

.80**

(.02)

.78**

(.02)

1.08**

(.01)

.41**

(.06)LogImpPopulation .88**

(.01)

.80**

(.05)

.45**

(.05)

.91**

(.01)

.28**

(.05)

.79**

(.02)

.78**

(.02)

LogExpRealGDPp/c 1.55**

(.01)

1.24**

(.03)

1.25**

(.04)

1.16**

(.02)

1.20**

(.02)

1.60**

(.01)

1.27**

(.03)

LogImpRealGDPp/c 1.18**

(.01)

.87**

(.03)

.84**

(.03)

1.22**

(.01)

.85**

(.03)

.94**

(.02)

.95**

(.02)

CurrencyUnion 1.03**

(.10)

.56**

(.09)

.67**

(.10)

.82**

(.10)

.62**

(.09)

.80**

(.10)

.60**

(.09)

CommonLanguage .45**

(.04)

n/a .34**

(.03)

.44**

(.03)

.35**

(.03)

.39**

(.03)

.33**

(.03)

RTA .27**

(.03)

.29**

(.02)

.43**

(.03)

.33*

(.03)

.46**

(.03)

.42**

(.03)

.47**

(.03)CommonBorder .68**

(.08)

n/a .46**

(.08)

.45**

(.08)

.46**

(.08)

.70**

(.08)

.44**

(.08)

#Islands .17**

(.03)

n/a 3.86**

(.32)

.39**

(.03)

.55**

(.08)

.04

(.04)

.68**

(.08)

LogProductArea .07**

(.01)

n/a .57**

(.03)

.06**

(.01)

.02

(.02)

.07**

(.01)

.02

(.02)

CommonColonizer .58**

(.06)

n/a .75**

(.05)

.58**

(.05)

.77**

(.05)

.74**

(.05)

.74**

(.05)

CurrentlyColony .61*

(.24)

.38*

(.19)

.95**

(.25)

.75**

(.22)

.94**

(.22)

.81**

(.24)

1.02**

(.24)

EverColony 1.45**

(.10)

n/a 1.42**

(.09)

1.49**

(.09)

1.40**

(.09)

1.31**

(.09)

1.43**

(.09)CommonCountry .09

(.71)

n/a .95*

(.41)

.41

(.38)

.93**

(.35)

.35

(.62)

.99*

(.42)

YearEffects Yes Yes Yes Yes Yes Yes Yes

DyadicFixedEffects Yes

ExporterFixedEffects Yes Yes

ImporterFixedEffects Yes Yes

Exporter*TimeFixedEffects Yes Yes

Importer*TimeFixedEffects Yes Yes

R2

.61 .85 .69 .66 .69 .64 .69

RMSE 2.18 1.40 1.94 2.04 1.94 2.09 1.94

449,220bilateralannualobservationscovering196countries,19502006. Robuststandarderrors(clusteredby

dyads)inparentheses. Coefficientssignificantdifferentfrom0at.05(.01)markedwithone(two)asterisk(s).


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21

Table2:SensitivityAnalysisofPermanentOlympicsExportEffectFixedEffects: Years Years,Dyads Years,Exporters,Importers

SubstituteImportsfor

Exports

.62**

(.04)

.50**

(.04)

.65**

(.05)

StrippedDownGravityModel .30**

(.04)

.22**

(.04)

.27**

(.04)

AddRegionalDummies .21**(.04) .24**(.03) .30**(.04)

DropLatinAmerican,

CaribbeanImporters

.28**

(.04)

.22**

(.04)

.29**

(.04)

DropAfricanImporters .37**

(.04)

.26**

(.04)

.34**

(.04)

DropAsianImporters .35**

(.04)

.26**

(.04)

.33**

(.04)

DropMiddleEastern

importers

.33**

(.04)

.24**

(.04)

.30**

(.04)

DropIndustrialImporters .31**

(.04)

.25**

(.04)

.27**

(.04)

OnlyMiddleIncome

Exporters

.39**

(.13)

.88**

(.14)

.86**

(.14)

OnlyMiddleIncomeImporters

.33**(.05)

.28**(.05)

.27**(.06)

DropSmall(


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22

Table3:ThePermanentEffectsofOtherMegaEventsonLogExports

A. EffectsofHostingOlympicsandWorldCupFixedEffects: Years Years,Dyads Years,Exporters,

Importers

OlympicEffect .30**

(.04)

.19**

(.03)

.22**

(.04)WorldCupEffect .31**

(.03)

.18**

(.03)

.27**

(.03)

Olympic=WorldCup

Effect?(pvalue)

.80 .95 .39

B. EffectsofHostingOlympicsandWorldsFair/ExpoFixedEffects: Years Years,Dyads Years,Exporters,

Importers

OlympicEffect .26**

(.04)

.21**

(.03)

.26**

(.04)

WorldsFair/ExpoEffect .19**(.04)

.07**(.03)

.09**(.03)

Olympic=Worlds

Fair/ExpoEffect?(pvalue)

.24 .00** .00**

Coefficientonpermanenteffectofhavinghostedamegaevent. Standarddatasetincludesupto449,220bilateral

annualobservationscovering196countries,19502006. Robuststandarderrors(clusteredbydyads)in

parentheses. Coefficientssignificantdifferentfrom0at.05(.01)markedwithone(two)asterisk(s).

Regressandislogrealbilateralexports. Controlsincludedbutnotrecorded:LogDistance;LogExporterPopulation;

LogImporterPopulation;LogExporterRealGDPp/c;LogImporterRealGDPp/c;CurrencyUniondummy;Common

Languagedummy;RTAdummy;CommonLandBorderdummy;#Islands;LogProductArea;CommonColonizer

dummy;CurrentColonydummy;EverColonydummy;andCommonCountrydummy.


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23

Table4a:ThePermanentEffectsofOlympicHostingandCandidacyonLogExportsFixedEffects: Years Years,Dyads Years,Exporters,

Importers

OlympicHostingEffect .30**

(.04)

.20**

(.03)

.24**

(.04)

OlympicCandidacyEffect .20**(.03)

.25**(.03)

.34**(.03)

Hosting=CandidacyEffect?

(pvalue)

.02* .26 .04*

Table4b:EffectofHostingandbeingRunnerUponLogExportsOlympicHostingEffect .33**

(.04)

.23**

(.03)

.29**

(.04)

RunnerUpEffect .09*

(.04)

.22**

(.04)

.31**

(.04)

Hosting=RunnerUp

Effect?(pvalue)

.00** .75 .68

Coefficientonpermanenteffectofhavinghosted/beenacandidate/beentheleadingrunnerupfortheSummerOlympics. Standarddatasetincludesupto449,220bilateralannualobservationscovering196countries,1950

2006. Robuststandarderrors(clusteredbydyads)inparentheses. Coefficientssignificantdifferentfrom0at.05

(.01)markedwithone(two)asterisk(s).

Regressandislogrealbilateralexports. Controlsincludedbutnotrecorded:LogDistance;LogExporterPopulation;

LogImporterPopulation;LogExporterRealGDPp/c;LogImporterRealGDPp/c;CurrencyUniondummy;Common

Languagedummy;RTAdummy;CommonLandBorderdummy;#Islands;LogProductArea;CommonColonizer

dummy;CurrentColonydummy;EverColonydummy;andCommonCountrydummy.

Table5:TetradicPermanentEffectsofOlympicHosting/CandidacyonLogExportsBaseExporter USA Japan Germany

BaseImporter

UK

France

Canada

Effectof

Host/Candidacy

.44**

(.04)

.45**

(.04)

.76**

(.04)

Observations 534,820 523,406 514.703

Bilateraldatasetcovers196countries,19502006. Robuststandarderrorsinparentheses. Coefficientssignificant

differentfrom0at.05(.01)markedwithone(two)asterisk(s).

Regressorsincludedbutnotrecorded:CurrencyUniondummy;andRegionalTradeAgreementdummy. Year

effectsincludedbutnotrecorded.


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25

Figure1:TheOlympicEffectonExports

0

.5

1

-20 Bid Games 20 40

No Fixed Effects

0

.3

.6

-20 Bid Games 20 40

Country Fixed Effects

0

.3

.6

-20 Bid Games 20 40

Country-Pair Fixed Effects

449,200 bilateral observations (1950-2006, 196 countries), gravity controls

Mean, with +/-2 se Confidence Interval

Export Effect of Any Summer Olympic Bid


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26

Figure2:UnsuccessfulOlympicBidsandExports

0

.5

1

-20 Bid Games 20 40

No Fixed Effects

0

.3

.6

-20 Bid Games 20 40

Country Fixed Effects

0

.3

.6

-20 Bid Games 20 40

Country-Pair Fixed Effects

449,200 bilateral observations (1950-2006, 196 countries), gravity controls

Mean, with +/-2 se Confidence Interval

Failed Summer Olympic Bids and Exports


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27

AppendixTableA1:HostsandUnsuccessfulCandidateCitiesforPostWarSummerOlympicsGames

Host UnsuccessfulCandidates

1948 London,UK Baltimore,Lausanne,LosAngeles,Minneapolis,Philadelphia.

1952 Helsinki,Finland Amsterdam,Chicago,Detroit,LosAngeles,Minneapolis,Philadelphia.

1956 Melbourne,

Australia

BuenosAires,Chicago,Detroit,LosAngeles,MexicoCity,Minneapolis,Philadelphia,

SanFrancisco

1960

Rome,Italy Brussels,Budapest,Detroit,Lausanne,MexicoCity,Tokyo.

1964 Tokyo,Japan Brussels,Detroit,Vienna.

1968 MexicoCity,Mexico BuenosAires,Detroit,Lyon.

1972 Munich,Germany Detroit,Madrid,Montreal.

1976 Montreal,Canada LosAngeles, Moscow.

1980 Moscow,USSR LosAngeles.

1984 LosAngeles,USA None

1988 Seoul,Korea Nagoya.

1992 Barcelona,Spain Amsterdam,Belgrade,Birmingham,Brisbane,Paris.

1996 Atlanta,USA Athens,Belgrade,Manchester,Melbourne,Toronto.

2000 Sydney,Australia Beijing,Berlin,Istanbul,Manchester.

2004 Athens,Greece BuenosAires,CapeTown,Rome,Stockholm.

2008

Beijing,China Istanbul,Osaka,Toronto,Paris

Dataavailableathttp://www.olympic.org/uk/games/past/index_uk.asp?OLGT=1&OLGY=1992

AppendixTableA2:DeterminantsofBiddingforandHostingtheSummerOlympics

Treatment(1) Control(0) Log(Export/GDP) Log(Population) Log(RealGDPp/c)

Host NonHost .43

(.31)

.24

(.13)

.68**

(.20)

Bidder(Hostor

UnsuccessfulCandidate)

NonBidder .31

(.20)

.42**

(.09)

1.01**

(.15)Host Unsuccessful

Candidate

.64

(.63)

.23

(.28)

.43

(.52)

Probitestimation;yeareffectsincludedbutnotrecorded. Coefficientswithstandarderrorsinparentheses;

coefficientssignificantlydifferentfromzeroat.05(.01)levelmarkedwithone(two)asterisk(s).


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Anderson,J.E.,andE.VanWincoop(2003)GravitywithGravitas:ASolutiontothe

BorderPuzzle"AmericanEconomicReview,93(1),170192.Banerjee,A.(1992)ASimpleModelofHerdBehavior"TheQuarterlyJournalofEconomics,107(3),797817.

Bartolini,L.,andA.Drazen(1997)CapitalAccountLiberalizationasaSignal"AmericanEconomicReview,87(1),138154.Coates,D.(2007)StadiumsandArenas:EconomicDevelopmentorEconomicRedistribution?"

ContemporaryEconomicPolicy,25(4).Head,K.,T.Mayer,andJ.Ries(2010)TheErosionofColonialTradeLinkagesAfterIndependence

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Olympics"availableathttp://www.selig.uga.edu/forecast/olympics/OLYMTEXT.HTM.

Krugman,P.(1998)TheConfidenceGame"TheNewRepublic.Lucas,R.E.J.(2009)TradeandtheDiffusionoftheIndustrialRevolution,"AmericanEconomicJournal:Macroeconomics,1(1),125.

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Murphy,K.M.,A.Shleifer,andR.W.Vishny(1989)IndustrializationandtheBigPush"JournalofPoliticalEconomy,97(5),10031026.Owen,J.G.(2005)EstimatingtheCostandBenefitofHostingOlympicGames"TheIndustrialGeographer,1(3),118.

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Endnotes

1 Sinceweincludebothtime andcountry/dyadspecificfixedeffects,thiscanbeviewedasadifferencein

differencesestimator.

2 WehavealsoestimatetheSummerOlympiceffectalongwithaseparateWintereffectoracombinedSummer

andWintereffect;earlierversionsofthepapercontaintheresults. WhiletheWintereffectisgenerallyeconomicallyandstatisticallyinconsequential,thecombinedWinterandSummereffectisquitesimilartothe

effectassociatedwithonlytheSummergames.

3 Still,supportfromthenationalauthoritiesisnowaprerequisiteforaseriousapplication.

4 P1ofCandidateCitiesandVenuesfortheWinterOlympicsavailableat

http://multimedia.olympic.org/pdf/en\_report\_666.pdf

5 WenoteinpassingthattherehasbeenrelativelylittlecompetitiontohosttheWorldCup,sothatweareunable

toplausiblycomparehostsandunsuccessfulcandidates,aswedobelowfortheOlympics.

6

ThefundamentalsofrelevancefortradeseemessentiallyunrelatedtothecharacteristicsofagoodOlympicbid.7 Wefocusourattentionontheeffectsofmegaeventsontraderatherthantradepolicysincethelatterisdifficult

tomeasure. WehaveexperimentedwiththeWacziargWelch(2008)measureoftradeliberalization,andfindthat

itispositively(andoftensignificantly)correlatedwithpastOlympichostingorcandidacy,evenaftertakinginto

accountfactorslikecountrysizeandincometime andcountryeffectscontrollingfor. Thisresultisquite

consistentwiththemodelwedevelopbelow. However,wedonotconsiderthisavenueofresearchtobeworth

pursuinguntilwehavebetterempiricalmeasuresandmodelsoftradeliberalization.

8 Forcomputationalreasons,weestimateourmatching effectsusingonlyexportstodevelopedcountries.}

9 Weassumethatcapitalmarketsareopen.

10

Theinducedcapitalinflowsareonlyoneexampleofthepotentialbenefitsthatmightresultfromsendingacrediblesignaloftheapproachingliberalization.Thesignalmayalsoinduceadditionaldomesticinvestment,or

othertypesofcooperativebehaviorbydomesticagents.

11 BiddingfortheOlympicsandnothostingthemwouldbehighlyembarrassingandwouldadverselyimpacta

nation'sinternationalreputation.Theseareinfrequent,highlyvisibleeventswithlongleadtimes. Weknowof

onlyonecounterexample;Denverbackedoutofhostingthewintergamesin1976whenvotersrejectedabond

issuetofinancetheevent. Wealsoruleoutsignalsbycountriesthathavenochanceofwinningtherightstohost

thegamesas ,theprobabilityofwinninghostingrightsconditionalonbidding,iscommonacrosscountries.

12Thewelfarefunctionisspecifiedintermsofearningsineachsectorforsimplicity.Thisfunctionisassumedto

encompassallproceedsinthesesectors,includinganyredistributionofgovernmenttariffrevenuesandtheeffects

ofothertradedistortionsthatyielddifferentialvaluationsofdomesticpricesunderclosedandopenpolicies.

13 TherearealsoexamplesofunsuccessfulOlympiccandidateswholiberalized. Forinstance,SouthAfricabegana

dramatictradeliberalizationinthemid1990swhileitmounted(andlost)itsbidtohostthe2004Olympics(the

choiceofAthenswasannouncedinSeptember1997).

Documents

The Olympic Effect - Andrew K Rose & Mark M Spiegel -2010