sabotage versus public choice: sports as a case study for interest group theory

Sabotage versus Public Choice: Sports as a Case Study for Interest Group TheoryAuthor(s): Ian HudsonSource: Journal of Economic Issues, Vol. 36, No. 4 (Dec., 2002), pp. 1079-1096Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4227848 .

Accessed: 24/06/2014 22:54

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Association for Evolutionary Economics is collaborating with JSTOR to digitize, preserve and extend access toJournal of Economic Issues.

http://www.jstor.org

This content downloaded from 185.44.77.40 on Tue, 24 Jun 2014 22:54:06 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=aee

http://www.jstor.org/stable/4227848?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


JOURNAL OF ECONOMIC ISSUES Vol. XXXVI No. 4 December 2002

Sabotage versus Public Choice: Sports as a Case Study for Interest Group Theory

Ian Hudson

Most interest groups must look with no small degree of envy at the quite remarkable success of professional sports teams in the United States when it comes to attracting public transfers. Out of twenty-one professional sports facilities under construction in 1998, only three had no government financing. Indeed, in fourteen of the twenty-one projects government was financing more than 50 percent of the total cost. In all, various levels of government spent about $3.3 billion on facilities for professional sports teams between 1998 and 2001 (Grange 1998, A25). This success rate is all the more remarkable given the overwhelming evidence that there is little economic reason for subsidies.

This unusually successful record provides an interesting opportunity to examine two contrasting theories that seek to explain the allocation of government transfers among competing societal demands. The more popular among mainstream economists is public choice interest group theory, which emphasizes individual rational maximiza- tion of gains in the political process and the accompanying "waste" of resources. Institutionalists provide an alternative explanation. Drawing on Thorstein Veblen's idea of sabotage, they argue that corporations have an inherent political advantage in a capitalist economic system because of their ability to affect the economy through investment decisions. An important implication of this theory is that corporate political power will fluctuate with the credibility of their threats to alter the amount they will invest.

This paper will use sports subsidization as a case study to test the explanatory power of these two theories. The first and second sections will provide a brief outline of public choice and institutional explanations of state transfers. The third section will apply these two theories to the case of professional sports subsidization.

The author is Assistant Professor in the Department of Economics, University of Manitoba, Winnipeg, Canada. He would like to thank Ken Dennis, John Loxley, Jim Dean, and two anonymous referees for their insightful comments.

1079



1080 Ian Hudson

Public Choice Interest Group Theory

Public choice theory is the current favorite approach for many economists attempting to venture into the political realm. Much of the reason for this is that public choice theory draws heavily on the analytical strengths of economists. The starting premise of what is broadly defined as public choice theory is that the tools of microeconomic analysis can be usefully applied to the political system. A rather telling quotation from Gary Becker will illustrate the general assumptions of public choice writers. "Political equilib- rium has the property that all groups maximize their incomes by spending their optimal amount on political pressure, given the productivity of their expenditures, and the behavior of other groups" (1983, 372). Clearly, there is much in common between the political world and the functioning of the market in the eyes of public choice authors. Generally, actors are believed to behave rationally in the political system. They will undertake an action only when the marginal benefits of doing so are anticipated to out- weigh the marginal costs. The basic assumptions of the theory can be traced to the groundbreaking work of three authors: George Stigler (1971, 1974), Sam Peltzman (1976), and Becker (1983). While there is some diversity in public choice writings, the basic tenets set out by these three trail blazers can be reasonably used to describe the beliefs of their followers.

In the public choice literature pioneered by Stigler, Peltzman, and Becker, the political world is populated by three rational actors: politicians, voters, and actors that form into interest groups. Politicians are motivated through self-interest. While the specific utility function of the politician has been the subject of some debate, it must surely be most strongly influenced by the desire to obtain and maintain political power. There- fore, a common assumption has been that politicians act as though they maximize votes. The politician can either attract votes by enacting policies favored by the voters or using interest group money to "purchase" votes through advertising and other information influencing methods.

Interest groups, both of producers and consumers, seek to convince politicians to grant them transfers in exchange for the provision of votes and money, the two things that politicians need to get elected. As rational actors, members of interest groups will engage in these activities only if the expected benefit outweighs the costs. In the contest to influence politicians, public choice theorists hold that producer groups are better positioned to organize than consumer groups in lobbying for positive and against negative transfers. The reason most often given for this is the increasing costs and decreasing benefits per person experienced by the necessarily larger consumer groups due to the free rider problem. Since benefits that accrue to any specific interest, such as protective regulation or pollution-free air, are non-excludable, each individual member of a group will have an incentive to free ride. As Peltzman (1976) was able to stress, however, the producer group will not entirely capture the transfer process as long as the consumer is able to influence the politician to some extent.



Sabotage versus Public Choice: Sports as a Case Study 1081

The last group specified in this theory is the voters. Since one voter's ability to influence an electoral outcome is infinitesimal, the gains from voting are small. When gath- ering information is costly, a rational voter will expend little time or energy in this process, allowing his or her perception of self-interest to be swayed by the easily accessi- ble information provided by politicians and interest groups.

The individual actors in the political system are assumed to act in the same rational fashion as individuals in a market context. The only difference is that the benefits and costs of the political system are different from those that exist in the market and so people's rational, maximizing behavior will reflect that difference. The most obvious and crucial distinction is that it is entirely rational for voters to remain ignorant in the political system but to be much more fully informed when making market decisions. It is important to stress that it is not the behavioral assumptions that are being changed here but the constraints in the different contexts.

Public choice interest group theory treats the political system as a market in which political transfers go to those with the highest demand. Although it is assumed that an informed, one-issue vote on a transfer from the voters/taxpayers to firms would invariably fail, the political system rarely offers either one-issue or well-informed voting. Instead, issues are bundled into platforms at election time and voters are "rationally" poorly informed. In this context, interest group expenditures, and their ability to influence voter decisions through information provision, become a crucial factor in political outcomes. 'While it is true that producers have more influence than consumers in the political system, this is due to their "advantage as a small group with a large per capita stake over the large group with more diffused interests" (Peltzman 1976, 212). For public choice writers, the ability to influence decisions, or power, in the political system is analogous to demand in the market.

Public choice interest group theoreticians have been very careful to distance themselves from any superficial similarities between their theories and any radical notions that capital has undue leverage in the political system. While on the surface it may appear that capital is using the state to transfer income from labor, as Robert Tollison claimed, "the confusion with Marxist theory is more apparent than real" (1982, 591). This is because outcomes are not determined by the power of classes or interests but by the costs and benefits facing the individuals that belong to those interests in the political system. Becker echoed this sentiment when he claimed that

active subsidized groups are sufficiently large to take advantage of scale econo- mies, but are not large relative to the groups harmed by their activities. I believe that these conditions, far more than the social significance of production rela- tions emphasized by Marx, explain the prominence in political life of economic pressure groups; (1983, 388)

Access to the political transfers does not depend on whether a group is either capital or labor. In fact, both capital and labor, or specific subsections of these two broad interests (industry groups and unions, for example), can develop significant political clout. In this



1082 Ian Hudson

theory of the state, the corporate world is able to win favorable treatment solely because of its large "demand" for transfers compared with the opposing "demand" of the taxpayers or consumers. The idea from which public choice authors are carefully distancing themselves is that capital, as a class (or interest group in public choice language), has an inherent political advantage in the capitalist system based on its ownership and control of the productive capacity in society. Public choice authors are deliberately navigating a course that steers clear of any unseemly notions that would suggest private ownership of capital provides any inherent advantage in the political system. Instead, political outcomes are determined by the costs and benefits facing rational actors.

An Institutional Explanation for Transfers to Business

An institutional explanation of transfers to the sport industry would not rely on the costs and benefits of rational actors but rather would focus on the special position of corporations in general, and on sports teams in particular, to influence government transfers. Steven Medema, in an excellent critique of public choice interest group theory, especially of its obsession on the "waste" created by rent-seeking activity, argued that an institutional approach to these issues needs to move toward an analysis that exam- ines alternative institutional structures and their impact on the distribution of rents. In a world of ubiquitous and competing claims for rents, the issue is not so much that of minimizing the waste through rents but rather that of who gets the rents (1991, 1061). In addition, an important change in emphasis would be involved in moving from the public choice tendency of treating any government intervention as a deviation from the natural state of the market to an acknowledgment that government will always play a crucial role in any economy. Therefore, a more evolutionary approach than the public choice model is needed that attempts to explain why economic rules change over time and who benefits from these changes.

This section will attempt to sketch a general theory of governmental transfers that follows in the tradition of previous institutional writers. The first step is to define just what should be classed as a governmental transfer. In public choice interest group theory, any deviation from the "natural" state of a free market outcome is classed as a transfer. Therefore, any increase in government intervention is classed as an increase in transfers and any withdrawal, a decrease. An institutionalist theory would reject any claims about a free market, without government intervention, being a "natural" state of affairs. This refutation of a desirable starting point allows an institutionalist theory to define any change in the current governmental rules concerning the economy, in which one group gains and another loses, as a transfer. As a quick example to illustrate the difference, if corporate taxes were reduced, public choice theory would see this as a move toward the natural state of less government. However, it could alternatively, and perhaps more accurately, be considered an increase in transfers to the corporate sector.




The next step is to outline the manner in which institutionalist writers have analyzed the behavior of interest groups in the political process. Surprisingly, some elements of institutional and public choice theories are quite similar. Like public choice writers, institutional theorists have argued that political outcomes are open to influence by those with either political or financial clout. According to Dennis Chasse, John R. Commons argued that the rise of the corporation created an institution with substantial influence over the democratic state for several reasons. The first, which in some ways resembles the arguments of public choice theoreticians, is that corporations are special interests that are already well organized and have a great deal to gain from favorable legislation, while the costs of legislation are spread over the vast multitude of a poorly organized populace. Second, corporations wield considerable financial muscle, enabling them to influence information and the media (Chasse 1997, 940).

John Munkirs and Michael Ayers continued in this vein by arguing that corporations and their lobby groups influence government decisions in several ways. Corpora- tions' financial wherewithal allows them to bankroll candidates who do not believe that government should be used to counteract corporate economic power. Corporations also finance think tanks and other venues to create a consensus between the political and corporate elite and then ensure that this consensus is communicated to the general public. In addition to these monetary efforts to influence the political system, corporations work to ensure that the top bureaucratic posts in government are filled by those from important positions in the corporate sector (1989, 322). So for both public choice and institutional writers, policies are less the result of any genuine expression of wants and needs on behalf of the electorate and more the outcome of powerful interests spending money to lobby politicians and develop a consensus in order to press forward their particular agenda. While the public choice discussion relies on the traditional economic assumptions of utility and profit-maximizing behavior, for which institutionalists would have little sympathy, and public choice authors would downplay any idea of an elite, they both argue that voters' decisions are easily influenced by the provision of information and that the nature of the political system makes lobbying politicians a worthwhile activity.

Despite these similarities, there is much to separate the two schools. Perhaps most importantly, institutionalists emphasize power relationships in society. In his descrip- tion of institutional economics, Warren Samuels claimed that one of the common elements of this school is its belief that the "real determinant of resource allocation is not the market but the organizational-institutional, power-structure of society" (1987, 865). It is certainly worth contrasting this view of allocation with the public choice school's desire to describe political outcomes as determined by a market for legislation or transfers. An important strand of institutional thought argues that corporate political power comes through corporations' ability to influence the economy by investment decisions. Therefore, even if opposing groups were able to somehow marshal the resources to rival corporate lobby groups, the state would still most often implement



1084 Ian Hudson

policies that were in business's interests. This assertion marks a dramatic break with public choice theorists.

Veblen used the term sabotage to describe the deliberate, although entirely legal, practice of peaceful restriction, delay, withdrawal, or obstruction used to secure some special advantage or preference (1921, 10). While sabotage is a quite broad term, encompassing activities by both firms and workers with and without the aid of the government, this paper is specifically concerned with corporations acting through the political system. Government policies such as tariffs and subsidies to domestic industries were seen as sabotage in the sense that they are usually designed to benefit some vested interests which own and control much of the nation's resources (19). More generally, Veblen argued that government policy will only very rarely work to the detriment of the business community. This is primarily because the populace, especially of the United States, felt that businesses contributed to the material wealth of society and, therefore, any policies to hinder the interests of business would hinder the material progress of society in general (1904, 287). This line of thought was also pursued by Commons, who argued that the business community, as a whole, is responsible for economic prosperity and by withholding credit can create economic problems that can defeat unwanted candidates (Chasse 1997, 940). It is on this ability to influence public policy through corporate investment decisions that this paper will concentrate.

In what James Cypher called his "general theory of the state," he argued that there is much to the Marxist notion that the state is an agent of capitalist accumulation. How- ever, in democratic societies the ideals of "the inalienable rights of man" are expressed in popular-democratic pressures on the state to enact policies that increase the social wage as well as the more obvious desires for civil liberties and equality before the law. Democracy permits significant, although hardly dominant, pressure on the state to implement policies that go against its role as an agent for accumulation (1980, 336). In periods of growth the populist demands are much more likely to be met, but even when acceding to populist pressures a capitalist state must attempt to reproduce conditions favorable for capital accumulation and so concessions can only be gained as far as they legitimate, as opposed to compromise, the capitalist system. In crisis periods, the needs of accumulation take much greater priority as the corporate world attempts to restruc- ture and restore profitability. In the context of falling profits, corporations will be much more successful in both getting the state to transfer its spending to activities that support profits and in reducing its share of the burden of the state (340).

Cypher's analysis highlights two important elements about corporate power in the political system. The first is that in a society in which jobs are provided by a private, profit-driven corporate sector, the state cannot be an expression of the collective will of the public, or even, as public choice authors claim, an expression of demand for legislation. The necessity of continued corporate profitability creates an inherent source of political power accruing solely to firms. The second important component is the realiza- tion that this source of power is not always equally strong. For Cypher, the political power of capital would wane during growth periods when profits were high and wax in




times of stagnation when profits were low, creating an important inverse relationship between corporate profits and corporate political power.

Walter Adams and James Brock were rather more explicit about just what types of firms are more likely to receive government transfers. According to Adams and Brock, the most understudied benefit of large corporations is their ability to attract government bailouts. The premise behind this argument is that once a firm has obtained a certain size, the economic implications of its failing become sufficiently catastrophic that governments are placed under tremendous pressure to prevent this from occurring (1987, 62). Government transfers are much less likely for more diminutive enterprises since "as long as firms are relatively small in size, these private failures are prevented from becoming social disasters" (81).

As a quick aside, it may be worth reconciling the ideas of Adams and Brock about the importance of size in attracting public transfers and the observation that sports teams are a very small piece of the overall economic pie. It is surely no coincidence that in every request for subsidies sports teams invariably argue that they may be small, but they wield considerable economic clout, not merely in terms of their direct impact through employment provision and tourism increases but, more importantly, through their indirect impact of attracting workers and employers to a "big league" city. Notwith- standing the legitimacy of these claims, the reason they are inevitably made is to convince the voting public of the economic size of the team in relation to the region in question.

While Adams and Brock have focused their attention on the size of the corporation, they are implicitly acknowledging another crucial factor in whether corporations receive government favors. Each request for a political transfer is accompanied by a more or less explicit threat-that should the transfer fail to materialize, investment will be withdrawn, jobs will be lost, and economic growth will slow (1987, 69). This is true whether the company is on the brink of bankruptcy, as with Chrysler between 1978 and 1981, or whether it can simply make more money elsewhere. As Adams and Brock argued, a corporation uses "the threat of moving or contracting its operations as potent bargaining points in its dealings with . . . state political leaders" (1987, 75). It would, therefore, seem likely that it is not merely the request for assistance and the size of the company that would prompt a bailout but also the likelihood that the company would actually either fail or relocate out of the government's jurisdiction.

Veblen, Commons, Cypher, and Adams and Brock were all arguing that corporate power in the political system, at least in part, stems from its ability to influence the economy by withdrawing or withholding investment. The strength of this particular form of sabotage depends on the likelihood of firms either withdrawing or withholding investment, which is greater in two situations. The first, and most obvious, is if the firm is not profitable. If a firm loses less money by exiting the industry than continuing operations there is clearly a cost to doing business. In addition, if capital is mobile, and it is possible to make different profits in different locations, then it also must be that if a firm is not operating in the most profitable location, there exists an opportunity cost of remaining



1086 Ian Hudson

in its current location. If this is the case, firms have an incentive to leave their current location. The hypothesis of this paper is that an institutional interest group theory implies that the greater a firm's opportunity cost of remaining in place, the more likely it is to attract a favorable change in the current set of economic rules through political action.

This is not to deny the importance of informational bias or political influence in any decision to change government transfers. The goal of this paper is not to dispute or even downplay these very astute observations but merely to point out that convincing the public that a change to the structure of economic rules is wise public policy will be either more or less Herculean depending on the opportunity cost of the corporation or group of corporations maintaining their current investment status. A firm enjoying larger profits than it is liable to receive elsewhere could place people in positions of import in government, create press releases demonstrating the benefits of changing the tax and transfer system in its favor, and donate money to sympathetic political candidates, but it is going to be much less likely to receive that transfer than a firm that could make more money elsewhere.

To summarize, corporations have more power than other actors in the political system partly because of their financial clout and personal connections but more importantly because of their ability to influence the economy through their investment decisions. A firm (or group of firms) is more likely to receive government transfers the greater its size and the greater the opportunity cost of maintaining its operations in its current location, which depends on the profitability of the current location compared with the profitability of the next best alternative. No such connection appears to be implied in public choice interest group theory, which holds that this observed outcome is simply the result of an unequal calculation of the costs and benefits of political action.

In order to illustrate the difference between the institutional theory highlighted above and that put forward by public choice authors, it is useful to examine how one public choice author, Becker, predicts increased mobility will impact government transfers. He developed a model in which any request for a transfer from any interest group will elicit countervailing pressure from those taxed. Further, any tax and transfer pro- gram that is not efficiency increasing (basically, anything that is not a public good) must be associated with a deadweight loss as the tax and transfer activity distorts behavior. As deadweight losses increase, the incentive to lobby for the transfer decreases while the incentive to lobby against the transfer increases, limiting any interest group's ability to attract political gains. Therefore, the larger the deadweight loss associated with any particular transfer from taxpayers to interest groups, the greater the taxpayer resistance and the lower the amount of the transfer. Conversely, transfers with smaller deadweight costs are more likely to be obtained.

Subsidies . . . cause small dead weight loss when supply elasticities are low, say because capital and labor are not very mobile. Short-run mobility is lower when more is invested in human capital specific to a firm or industry. Therefore,




workers and firms with sizable specific investments tend to have relatively large gains from lobbying for government protection. (Becker 1985, 339)

Interestingly, since taxes on these companies also have low deadweight costs, these firms are also vulnerable to high taxation.

This result highlights public choice theorists' reliance on costs and benefits as determinants of corporate political influence. Corporate mobility does play a role in firms' access to transfers, but only insofar as mobility affects the efficiency of the tax and transfer mechanism. "Policies that raise efficiency are likely to win out in the competition for influence because they produce gains rather than deadweight costs, so that groups benefitted have the intrinsic advantage compared to groups harmed" (Becker 1983, 396). The shortfall of this approach is that Becker is unwilling to acknowledge that firms' political power is rooted in their ability to influence the economy through investment decisions and, in this case, this error leads him to precisely the wrong conclusion-that less mobile firms are more likely to receive transfers. The theory presented in this paper suggests that because the state needs to encourage private sector investment in order to ensure a reasonably thriving economy, greater mobility will increase the transfers to corporations.

It may also be useful to compare Becker's explanation of the government transfers to Chrysler in the early 1980s with that made by Adams and Brock. For Becker, the Chrysler bailout was largely due to the very large investment that workers had made in industry-specific capital, generating much higher wages than they would have received in alternative employment (1983, 383). In contrast, Adams and Brock argued that it is the sheer size of Chrysler, and the corresponding negative impact on employment should such a large firm go under, that prompted the bailout (1987, 66). Of these two interpretations, I would argue that Adams and Brock's is considerably more realistic. The extension of Becker's theory is that a smaller firm and its workers, equally adept at lobbying as Chrysler and with a similarly large fixed capital investment, would have a greater chance of getting a bailout since the opposition from taxpayers and the deadweight loss would be lower. The Adams and Brock theory implies that this would not be the case; smaller firms are less likely to receive subsidies or bailouts because of their min- imal impact on employment. Once again, the core of the difference between these two ideas is that Adams and Brock, unlike Becker, argued that corporations have an advantage in the political system unavailable to other groups-namely the ability to create or destroy jobs through investment decisions.

A Test Using Professional Sports Franchises

The differences between an institutional theory, which emphasizes the ability to influence government policy through the power of investment, and public choice theory, which makes no such claims, yields some potentially testable implications. Using the sports industry as a case study, the theories should be able to predict which teams are



1088 Ian Hudson

most likely to receive subsidies. The institutional theory would predict that teams with a higher opportunity cost of remaining in their current location should be more likely to receive transfers. No such implication is suggested by the interest group theory's reliance on the costs and benefits of lobbying activity.

Determining the opportunity cost of teams involves two components: the profitability in an alternative location and the profitability in the current location. First, I will deal with the potential profits to be had by relocating. It should be safe to assume that the value of the next best alternative is equal for all the teams in a league. This is a valid assumption if any vacant city would be an equally profitable alternative location for all of the current franchises in a given league, which holds if each city seeking a team has no preferences between franchises and would, therefore, offer a similar subsidy or lease deal to all potential teams. This does seem to be the case. Both St. Petersburg's search for a baseball team in the 1990s and Jacksonville's search for a National Football League (NFL) franchise between 1979 and 1990 involved attempting to lure a variety of franchises in each sport with very similar inducements (Norton 1993, Al). What is crucial for any vacant city is entrance to the league, not the team that provides the access. If the profit in an alternative location is the same for all of the teams in the same league, then the opportunity cost for each team depends solely on the quite different profits of each team in their existing location.

It is also quite probable that low income or franchise values for a team could be improved in an alternative location. Professional sports leagues' control over their franchise numbers has meant that in any given sport there are usually several cities capable of hosting profitable teams that remain vacant. In this situation it is quite likely that owners at the bottom end of the profitability spectrum can make a creditable argument that they could make more money elsewhere. It has also been true that low-earning teams attract interested buyers, keen to move the team and try their hand at sports management. New owners and new locations have greatly improved the profitability of National Hockey League (NHL) franchises like the Minnesota North Stars and Quebec Nordiques, who moved to Dallas and Colorado respectively. It is, therefore, possible to say that a team with lower profitability will have a positive opportunity cost of remaining and that, further, the lower the profitability, the greater the opportunity cost.

If an examination of the teams who have received subsidies finds that they are pre- dominantly plagued by lower profitability, this would favor institutional over public choice theory. The empirical sample will be taken from teams that have received, or been promised, public money for the construction of a new stadium under the assumption that public construction of a facility can be taken as evidence of subsidization. Given the very high incidence of subsidy rates found in the works of Dean Baim (1994) and James Quirk and Rodney Fort (1992), that assumption seems reasonable. The sample is also limited to teams that have been promised public money recently because the profitability of sports teams has only become part of the public domain since The Finan- cial World started estimating team's operating income in 1991.




This sample represents all of the teams in the NFL and major league baseball (MLB) that have signed deals for stadia that opened between 1999 and 2001 using at least 50 percent public funding. By examining the pre-subsidy profitability of these transfer-acquiring teams, it should be possible to determine whether there is a link between profitability and subsidization. There are two methods by which investors in sports franchises can profit from ownership. The first is the income stream from operations when revenues are greater than costs. The second is the capital gain from selling the franchise for more than it was purchased. If either of these measures is low, so that it is likely that either franchise value or net income would increase in an alternative location, then the fact that these teams have received subsidies should support the institutional version of interest group theory rather than the public choice model.

Tables 1 and 2 list the net operating income (revenue minus costs) and franchise values for the NFL and MLB teams that have received subsidized stadium construction. In addition, the league averages in these categories are also provided as a reference point with which to compare the financial performance of each team. The dates of the lease arrangement are included because, while operating income should only increase once the new stadium is constructed, the announcement of the terms of the new lease should be sufficient to change the value of the team. Therefore, the relevant operating income section of the table should be the entire period prior to stadium construction, while the franchise value should change on release of the lease agreement.

At this point, a disclaimer about the reliability of information on franchise earn- ings and net worth is probably warranted. The opportunities for creative accounting and transfer pricing are especially numerous when a team is a small, albeit very visible, cog in a much larger corporate machine, as is increasingly the case in the sports industry. While this certainly suggests it would be wise to view these figures with a certain degree of skepticism, the analysis is not wholly dependent on the numbers being correct down to the last dollar. Rather, we are concerned with the general standing of the subsidized teams compared to the rest of the franchises in the league. The income and franchise

Table 1. MLB Franchises Receiving Publicly Funded Stadiums 1999-2001

Operating Income Franchise Value (Millions) (Millions)

Team Stadium 1996 1997 1998 1996 1997 1998 Announced

Pittsburgh Pirates 1999 1.4 7.5 2.6 71 133 145

Houston Astros 1998 11.5 2.3 3.7 114 190 239

Seattle Mariners 1997 -1.7 11.4 -8.6 107 251 236

Milwaukee Brewers 1996 6.6 -4.8 -8.8 92 127 155

League Average 7.3 2.5 1.9 134 194 220

Sources: Financial World, Sports Valuation Issue, 1993-1997; Forbes, Sports Valuation Issue, 1998-1999.



1090 Ian Hudson

Table 2. NFL Teams Receiving Publicly Funded Stadiums 1999-2001

Operating Income Franchise Value (Millions) (Millions)

Team Stadium 1996 1997 1998 1996 1997 1998 Announced

Cincinnati Bengals 1997 10.1 1.7 3.4 188 311 394

Tennessee Titans' 1997 5.2 -0.4 4.1 193 322 369

Detroit Lions 1999 3.3 20.6 16.4 181 312 293

Pittsburgh Steelers 1999 4.9 -1.6 15.5 173 300 397

Denver Broncos 1998 0.7 2.5 5.0 182 320 427

Seattle Seahawks 1998 3.3 -10.9 6.4 171 324 399

League Average 5.5 5.3 19.7 205 288 385

'Houston Oilers prior to 1997. Sources: Financial World, Sports Valuation Issue, 1993-1997; Forbes, Sports Valuation Issue, 1998-1999.

data certainly appear to reflect what is considered to be the "established wisdom" in the sporting world, with the New York Yankees at the top and Montreal Expos at the bottom in baseball, the Dallas Cowboys and Arizona Cardinals providing the extremes in football. So, while it is quite possible that the Pittsburgh Pirates' franchise value was not exactly $145 million in 1998, it is probable that it was on the low end of the baseball spectrum.

Of the ten teams in the two-league sample, none posted above-average operating revenue for all three years prior to 1999. Only one of the ten teams, the Pittsburgh Pirates, managed to achieve above-average profits in two of these three years. Of the nine remaining teams, three did post above-average profits in one of the three years, and the remaining six teams were below average in all three years. This would certainly seem to suggest that the year to year profits of the teams receiving subsidies were, in general, on the low end of their respective leagues.

The franchise values are slightly more ambiguous. If we examine only the franchise values prior to the announcement of the public subsidy, there are only nine teams in the sample since the details of the Milwaukee Brewers' new field were released in 1996. Of these nine teams, five were below the league average in franchise values every year prior to the subsidy announcement. Two of the remaining four teams, the Denver Broncos and Seattle Seahawks, had below-average franchise values two years prior to the subsidy and above-average franchise values the year prior. The remaining two teams, the Detroit Lions and Pittsburgh Steelers, had above-average franchise values in two of the three years prior to agreeing on a deal with the government for stadium financing. In conclusion, in table 1, only one of ten teams appeared to have above-average operating revenue, and in table 2, only two of nine teams could be said to have above average franchise values. It would certainly seem that the vast majority of teams receiving subsidies have a




reasonably high opportunity cost of remaining in their current location, lending support to the institutional theory that accords investment decisions a role in public transfers.

Can this evidence be reconciled with the very high incidence of subsidization of all professional sports teams? If most teams are subsidized, does it not follow that teams with above average operating incomes must also be subsidized? While this is a valid com- ment, it does not refute the evidence presented above. The timing of the subsidy is important. At any given level of subsidies across teams in a league, institutional theory implies that the less profitable teams, at that particular time, are more likely to receive state financial aid. Once they have received the subsidy, it is possible that they would become much more profitable, dropping other teams into the ranks of the relatively impoverished. The newly poor teams would then become the likely subsidy candidates. Through this process it is possible for most teams in a league to become subsidized over an extended period.

In the five years from 1992 to 1996, the five teams in table 3 received publicly funded facilities. The table provides the rank of each team in terms of both its operating income and franchise value. The "stadium opened" column lists the year in which each team commenced play in its new facility. While a team's operating income should increase only after the new facility has opened, as mentioned earlier, the franchise value of the team may well increase before construction of the new venue has even started. The announcement of the new facility and its expected increase in revenue, often a year or two in advance of the opening, could lead to an increase in the value of the franchise. Franchise values are probably a better measure of long-term revenue potential as operating income in any given year can be influenced by a very wide variety of factors such as on-field success and, crucially, playoff performance.

Although some teams have certainly benefited more than others, every team in the sample has improved its standing in the franchise value ranking. While the Cleveland Cavaliers have only managed to improve their ranking slightly since their move to the new Gateway Arena, the Cleveland Indians moved from having the low- est franchise value in major league baseball to a remarkable sixth (of the twenty-eight teams operating in 1995) playing at the scenic Jacob's Field. Although the evidence is less categorical, the numbers on operating income also support the claim that new stadiums improve an owner's revenues. Four of the five teams (Rangers, Blues, Cava- liers, and Spurs) did move up the rankings in the season in which they moved into their new facility, although the Cavaliers did not maintain their improvement in the following season. The only real exception is the Cleveland Indians, who surprisingly slipped significantly in the two years immediately following their move to Jacob's Field despite their dramatic increase in franchise value. Overall, it does seem that the subsidies embodied in the construction of new facilities do result in higher franchise values and, slightly more tentatively, year to year profits. The increased profits of subsidized teams will change the ranking of the profitability, forcing down teams who were previously higher ranked in the league profitability standings. This has



Table 3. Change in Profitability of Teams with New Facilities Rank among Teams in the Same League

Operating Income Franchise Value

Team Stadium Open 1992 1993 1994 1995 1996 1992 1993 1994 1995 1996 91-92 92-93 93-94 94-95 95-96 91-92 92-93 93-94 94-95 95-96

Cleveland Indians 1994 5/26 5/28 15/28 13/28 7/28 26/26 13/28 13/28 12/28 6/28

Texas Rangers 1994 4/26 18/28 4/28 6/28 4/28 10/26 7/28 3/28 9/28 7/28

St. Louis Blues 94-95 14/22 19/24 22/26 19/26 10/26 13/22 11/24 12/26 13/26 10/26

Cleveland Cavs 94-95 12/27 18/27 10/27 6/27 14/29 7/27 6/27 6/27 6/27 6/29

San Antonio Spurs 93-94 13/27 9/27 7/27 9/27 8/29 12/27 10/27 11/27 10/27 10/29

Sources: Financial World, Sports Valuation Issue, 1993-1997; Forbes, Sports Valuation Issue, 1998-1999.




two implications. First, since the "new poorest" teams have higher profits than the pre-subsidy poorest, fewer cities will provide viable relocation options, reducing the opportunity cost of remaining in a team's current location. However, to the extent that this opportunity cost still exists (and currently this is certainly the case), it is the "newly poorest" teams that will be the ones likely to receive the subsidy. In this manner, it is possible for many of the teams in a league to be subsidized while, at any given moment in time, it is the least profitable teams that are most likely to receive the subsidy.

The interest group theory based on institutional ideas also wields more explanatory power than interest group theory based on the public choice model when examining several other aspects of the sports subsidy issue. For example, it permits us to contrast the English and North American subsidization situations. In England, as in much of Europe, professional sport is dominated by soccer. Despite the legendary English obsession for the sport, English soccer teams have not been able to elicit the same level of public funding received by North American professional sports.

The principal difference between the two situations seems to be the credibility of the threat of relocation. There are currently ninety-two English professional soccer teams vying for fans among the forty-four million strong population. Every major, indeed every minor, center is represented by at least one professional team. In the 2000-01 season, London, the largest market in the country, contained fifteen professional teams, five teams playing in the top professional division and ten others toiling away in the lower levels. In a situation in which the market for professional soccer teams is clearly saturated there is little opportunity to exploit unoccupied markets desperate for the excitement of the professional game. Threats of relocation by owners would be viewed not only with skepticism but with absolute disbelief by the public. In the entire modern history of the English game only one club, Wimbledon, which moved from its traditional home in the suburbs of London to Milton Keynes in 2002, has ever moved to another market. Therefore, in England there are almost never threats of relocation in an effort to lever money from the state. The reason for this is simply that the threats would not be credible, since relocation is not really a feasible option. In reference to the model outlined in the previous section, the opportunity cost for the English teams operating in their current location is nothing, unless the team is actually better off declaring bankruptcy. Therefore, any team not facing financial insolvency is unlikely to garner voter support for a transfer.

Of course, the situation in North American professional sports is radically different. The owners of all four professional leagues have kept a jealous guard over entry into their cartel. The result is that there are several cities large enough to support professional sports that do not have franchises. In this situation, the threat of relocation takes on much more credibility. Institutional theory would suggest that it is this credibility that accounts for the prevalence of subsidies in North America.

The need to establish a credible relocation threat also explains other aspects of the subsidization issue, such as owners' insistence on actively soliciting offers from cities



1094 Ian Hudson

seeking to attract professional teams. The institutional model predicts that the more credible the threat of moving, the more likely the transfer is to be granted. This is because voters need to be made aware of the size of the opportunity cost of remaining in the team's current location. The higher this opportunity cost, the more likely voter approval of the subsidy.

Let us take the example of the Cleveland Browns. Owner Art Modell had been lobbying for a publicly financed new stadium for years, arguing that he needed the increased revenue that new stadiums, and their accompanying frills like luxury boxes, are capable of generating. This request was greeted with little sympathy from either the city or the state until Modell entered into serious negotiations to move the team to Balti- more, who offered to build a brand new $200 million dollar stadium and to allow the team to keep all of the revenue that the facility generated. As it became increasingly apparent that Modell was serious about a move, the citizens of Cleveland became much more amenable to subsidizing the team. In fact, in a referendum voters decided to subsi- dize the Browns on the backs of sinners in Cleveland by approving an increase in tobacco and liquor taxes (Spiers 1996, 29). In the end these concessions were granted too late, and the Browns accepted the rather lucrative offer put together by Baltimore city officials. The main point here is that what changed the public's attitude toward subsidization was not a change in any of the costs or benefits to lobbying that traditional interest group theory would use to predict the outcome of the transfer but instead a marked increase in the credibility of the football team's threat to relocate. It is no acci- dent that team owners actively seek bids from alternative locations when lobbying for a subsidy. The primary objective in these efforts is to demonstrate that, in the absence of the requested subsidy, the alternative location is more profitable for the team.

A model that includes a recognition of the power of investment can also explain the changes that leagues have made in mobility restrictions for their members. In all professional leagues, if a team wishes to relocate, they must get approval from the rest of the owners. This was put in place both because each owner has a stake in where the others locate and to prevent owners from relocating into a previously occupied city and competing with an existing franchise. Clearly, the voting rules in this situation will have a large impact on the potential mobility of a team and thus the credibility of its relocation threat. Until quite recently, all four major professional leagues in North America had very conservative voting rules for deciding whether a team had the permission of the league to relocate. Indeed, both MLB and the NFL required unanimous consent of the other owners. Needing unanimous approval, teams moved less frequently, generally only if they could not profitably operate in their current market. These rules have been gradually relaxed, now only requiring the approval of three quarters of the owners even for moves into cities in which a league franchise already exists. As the voting rules have changed, threats of leaving became more credible, and the incidence of subsidization has increased. This model would suggest that the increased incidence of subsidization is a result of the changing league rules of relocation.




This institutional model can also help explain the level of government that awards the transfer. In traditional public choice theory, there is little consideration given to the level of government that interest groups lobby for their transfer. Presumably, the group seeking the transfer would choose the level at which the transfer was most likely to be awarded. An institutional theory offers a fairly explicit interpretation of the level of government that will be lobbied. Since the likelihood of the transfer depends, in part, on the opportunity cost of remaining in the current location, firms or industries have an improved chance of being awarded the transfer if they seek it from a level of government that they can exit. In the sports industry, the transfer comes from the state and local levels, not from the national government. This model would argue that this is because there is virtually no threat of any sports teams leaving the United States. Therefore, voters realize that no transfer is necessary for sports teams to remain in the region. At the state or local level, however, the threat of relocation is very real, resulting in a positive opportunity cost for remaining in the existing location. This would increase the chances of voters favoring a subsidy.

Conclusion

According to public choice theory, all groups with equal costs and benefits in the political system should have the same amount of political clout. The unwillingness of public choice theory to acknowledge the political power of private investment results in its misunderstanding the importance of capital mobility. In this formulation of the theory of the state, the Sierra Club and the AFL-CIO could potentially wield the same political clout as the business community. It is, of course, possible for these noncorporate organizations to gain political influence. In fact, as public choice theory suggests, their clout will depend on their ability to deliver votes or financial support for politicians. However, this type of activity is not the most important source of influence for firms. The institutionalist tradition following from Veblen's notion of sabotage explicitly recognizes that the economic importance of corporate investment decisions can be trans- lated into political power. It is the right, indeed the necessity, that companies locate in the most economically favorable location that is their most telling source of political influence. Were a large number of environmentalists to claim that they were going to move to seek a less polluted region in which to live, this would not be viewed with the same trepidation by politicians as a threat by corporations to leave. Political power that rests on the decision to invest will inevitably vary depending on the likelihood of withdrawing or withholding investment, which will in turn depend on the opportunity cost of remaining in place.

We have argued that this implies that firms with a larger incentive to change their investment in a region are more likely to receive subsidies, a theory that seems to have explanatory power in the case of professional sports subsidization. There is certainly a connection between opportunity cost of remaining in their current location and subsi-



1096 Ian Hudson

dies in the NFL and MLB. It also explains the different subsidization rates in English soccer and North American professional sports, the importance of relocation credibility, and the level of government that provides the subsidy.

It is possible that the theory developed in this work could be applicable beyond the sports case study analyzed here. It would be quite beneficial to expand on the work in this study to determine the extent to which it can be applied to other issues that involve groups vying for political transfers. As a test of the sports subsidization case it appears quite useful, but the true test of any theory is whether it can stand up to repeated testing and scrutiny. If this case is not unique, it suggests that a more institutional approach to interest group theory that explicitly recognizes the concept of sabotage may be an improvement on public choice theory.

References

Adams, Walter, and James Brock. "Corporate Size and the Bailout Factor." Journal of Economic Issues 21, no. 1 (March 1987): 61-85.

Baim, Dean. The Sports Stadium as a Municipal Investment. Contributions in Economics and Economic History, no. 151. Westport, Conn.: Greenwood Press, 1994.

Becker, Garry. "A Theory of Competition among Pressure Groups for Political Influence." Quarterly Journal of Economics 98, no. 3 (1983): 371-399.

Public Policies, Pressure Groups, and Dead Weight Costs." Journal of Public Economics 28 (1985): 329-347.

Chasse, Dennis, J. "John R. Commons and the Special Interest Issue: Not Really out of Date." Journal of Eco- nomic Issues 31, no. 4 (December 1997): 933-949.

Cypher, James. "Relative State Autonomy and National Economic Planning." Journal of Economic Issues 14, no. 2 (June 1980): 327-349.

Grange, Michael. "North American Sports Facilities." Globe & Mail, October 30, 1998, A25. Medema, Steven. "Another Look at the Problem of Rent Seeking." Journal of Economic Issues 25, no. 4 (Decem.

ber 1991): 1049-1065. Munkirs, John, and Michael Ayers. "Political and Policy Implications of Centralized Private Sector Planning."

In The Economy as a System of Power, edited by Marc Tool and Warren Samuels, 321-336. New Brunswick, N.J.: Transaction Books, 1989.

Norton, Erle. "Fourth and Goal: Football at Any Cost." Wall Street Journal, October 13, 1993, Al, A8. Peltzman, Sam. "Toward a More General Theory of Regulation." Journal of Law and Economics 2 (August 1976):

17-34. Quirk, James, and Rodney Fort. Pay Dirt: The Business of Professional Team Sports. Princeton, N.J.: Princeton Uni-

versity Press, 1992. Samuels, Warren. "Institutional Economics." In The New Palgrave: A Dictionary of Economics, edited by John

Eatwell, Murray Milgate, and Peter Newman, 864-867. London: Macmillan, 1987. Spiers, Joseph. "Are Pro Sports Teams Worth It?" Fortune Magazine, January 15, 1996, 29-30. Stigler, George. "The Theory of Economic Regulation." Bell Journal of Economics and Management Science 2, no. 1

(1971): 2-21. Free Riders and Collective Action: An Appendix to Theories of Economic Regulation." Bell Journal of

Economics and Management Science 5, no. 2 (1974): 359-365. Tollision, Robert. "Rent Seeking: A Survey." Kyklos 35 (1982): 575-602. Veblen, Thorstein. The Theory of Business Enterprise. New York, N.Y.: Charles Scribner's Sons, 1904. -. The Engineers and the Price System. New York, N.Y.: The Viking Press Inc, 1921.



sabotage versus public choice: sports as a case study for interest group theory

Documents