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Promise and Betrayal: Can We Really Expect the Olympics to Stimulate Local Economies?

By Adam Blair
October 14, 2012

Soon after the first starting pistol was fired, and this year’s London Olympics were underway, a curious observation crossed the Atlantic: the city was unusually quiet. Following months of warnings from local authorities of imminent disruptions resulting from a surge of visitors, The Telegraph, on the eighth day of the Games, reported a 17 percent decline in traffic, 10 percent decline in local shop patronage, and a 30 percent drop in visits to major tourist destinations. In other words, this world class event had the exact opposite effect of what most would expect. Quickly recognizing the overestimation of expected benefits to London’s economy, business groups began blaming authorities for the lull, believing their warnings to have had a perverse effect on economic activity by persuading many people to avoid the capital all together.

This explanation seems plausible, and finds some support in a recent example from the U.S., when public service announcements issued by Los Angeles officials meant to divert drivers from the storied Interstate 495 for construction worked flawlessly. But can an effective campaign fully explain the Olympics’ lackluster performance in the sport of generating local economic activity, or were the estimates overstated to begin with? The latter is not a new question, and it is one that evokes a past article on this very website. But it is a question worth revisiting as Rio de Janeiro—the second largest city in an emerging but still impoverished Brazil—prepares to host the 2014 World Cup and 2016 Olympic Games. After all, it is much more difficult know whether or not the massive public investment needed by Brazilians—currently estimated at $33 billion for both events—is worth it if the extent to which major sporting events benefit a regional economy is unknown.

Economists who have researched large events in the past seem to agree that impact figures are often overstated. This should be of little surprise, however, as such analyses are often commissioned before an event in order to increase public support for the investments needed. In a 2008 article on the economic impact of past Olympics, the economists Philip Porter and Deborah Fletcher cite a history of inflated estimations associated with the Games. These ex ante predictions, they write, “are used as justification for public subsidies and to help convince voters that it is good business to use scarce tax revenues to secure and promote the Games.” They found that what results, however, is “substantial debt” and “little or no noticeable benefits.”  

For these reasons, the authors caution against using input-output models to make predictions, advocating for estimations based on past results instead. Sparing the economic jargon, their reasoning rests largely on the fact that impact modeling drastically overstates expected economic benefits by translating the short-term, immediate stimulus from the Olympics into long-term, structural changes in a regional economy. To illustrate this point, imagine the World Cup is expected to increase the demand for hotel rooms in downtown Rio by 20,000 for the length of the tournament. In a modeled environment, hotels would respond to this demand by building enough rooms to accommodate every additional visitor. What we know from reality, and some economic theory, however, is that while some new rooms will certainly be built, much of the short-term demand will translate instead into higher prices.

As long as major events like the Olympics maintain their allure as world-class feats that prove a nation’s affluence and success, the fierce competition to act as host—and the impact studies meant to fuel that race—will continue. What we can hope for, then, is that the taxpayers supporting these massive investments push for unbiased and accurate analyses that expose the true costs and benefits. Winning gold when it comes to economic development, after all, requires knowing what the medal is actually worth.


Bialik, Carl. “The Economic Oomph From Big Events.” The Wall Street Journal, August 17, 2012. Accessed October 4, 2012.

Bolduc, Matt. “Cut the political talk, London 2012 was a bad investment!”, August 24, 2012. Access October 4, 2012.

Porter, Philip K., and Deborah Fletcher. 2008. “The Economic Impact of the Olympic Games: Ex Ante Predictions and Ex Poste Reality.” Journal of Sport Management 22: 470-486.