Estimating local welfare generated by an NFL team under credible threat of relocation.

Author:Fenn, Aju J.
 
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  1. Introduction

    "The Minnesota Vikings face a very serious challenge with the Metrodome that threatens our ability to survive. The Metrodome seriously limits the Vikings' revenue opportunities and will soon cause the team to be uncompetitive or lose millions of Dollars--or both." (1)

    The Minnesota Vikings are seeking a new stadium. Minnesotans know that the threat of relocation is a credible one, given their experience with the relocation of the Minnesota North Stars (a National Hockey League team that relocated to Dallas) and their awareness of the circumstances surrounding the relocations of the Cleveland Browns (now the Baltimore Ravens) and the Houston Oilers (now the Tennessee Titans). The Minnesota Vikings were sold by Red McCombs to Zygmund Will for $600 million. This paper is based on a survey conducted during the period that McCombs had the team up for sale. "In a written statement, Vikings owner Red McCombs expresses his frustration that the Legislature this year (2002) did not do more to help the football team realize its stadium dreams. In his statement, McCombs says he's engaged JP Morgan Securities to explore sale or relocation options for the team." (SOURCE: Minnesota Public Radio, May 21, 2002, Minnesota Public Radio) This circumstance provided us with a unique opportunity to examine the willingness to pay (WTP) for a new stadium when the threat of relocation is real. Here we undertake an analysis of the determinants of credibility and WTP under threat of relocation. This is a contingent valuation methodology (CVM) issue faced by all CVM practitioners. Using a sample selection model we find that respondents who think that the Vikings may leave give different answers than those who do not. (2) The key to any reliable survey is the credibility of the scenario. Using a situation with serendipitous timing, we are able to examine the WTP of respondents who believe that the team would relocate. We contrast these findings with those of respondents who do not believe that the team will relocate. The estimates help us to shed some light on the broader CVM question of the divergence in WTP estimates due to credibility of the payment scenario. The purpose of this paper is to develop and estimate an unbiased estimator of a respondent's household welfare generated by a professional sports franchise when the respondent perceives a risk of losing the franchise.

    There is copious economic literature on the costs and benefits of sports teams to communities. Some of the reasons cited for keeping or attracting a major league team are boosting the local economy and a heightened sense of civic pride (Siegfried and Zimbalist 2000). The majority of studies (Baade and Dye 1990; Noll and Zimbalist 1997; Rappaport and Wilkerson 2001; Baade, Bauman, and Matheson 2008) suggest that stadiums do not generate a large enough increase in income to be viable solely on the grounds of boosting the economy. A direct attempt to measure the fanaticism of team supporters using consumer surplus concluded that for most teams the consumers' surplus from attending games alone might be insufficient to justify building a publicly funded stadium (Alexander, Kern, and Neil 2000). However, for teams that have sell-out seasons, not all fans may be able to attend games. Moreover, National Football League (NFL) games for teams that sell out demonstrate public-good characteristics. These games are aired on television, and thus the performances are nonrival and nonexcludable for the local television audience. An analogous surplus may exist for fans who watch the games on television. The issue comes down to the value of the public-good aspects of the franchise to the residents of the area. Most studies in the literature (Baade and Dye 1990; Noll and Zimbalist 1997; Sanderson 2000; Siegfried and Zimbalist 2000) acknowledge that the public-good aspects of a team need to be valued. The public-good aspects for fans that are generated from discussing the team's fortunes, a sense of civic pride from having a major league team in town, and so forth, need to be valued. However, as is the case with all public goods, direct market valuation is not possible. Proponents of CVM, including Arrow et al. (1993) and Hanemann (1994), claim that if the methodology is properly applied, the results from CVM surveys can be trusted.

    Johnson, Mondello and Whitehead (2007) have examined the WTP for a stadium in the context of keeping the Jacksonville Jaguars in Jacksonville, Florida. They find that the WTP estimates of $36.5 million lie far below the subsidies paid to attract the Jaguars to the city of Jacksonville. Johnson, Groothius, and Whitehead (2001) investigate the positive externalities associated with building a new hockey arena for the Pittsburgh Penguins. They use CVM and model the survey respondents' WTP as a function of the suggested tax, the survey respondents' income, the number of games attended, public-good characteristics of the team, and other variables. They find that, while the team does display public-good characteristics, the public-good value generated by the team does not justify the cost of a new arena. They point out the need for additional studies on other teams in other cities.

    Unfortunately, Johnson, Groothius, and Whitehead (2001) conducted their survey in 2000, just after a consortium of investors had bought the team in 1999, and the credible threat of relocation or contraction had passed. In addition, the survey was conducted in February, during the hockey season. One might argue that responses by fans may be biased by the current performance of the team. While in-season surveys may bias the WTP upward, out-of-season surveys (although they are free from current team performance) may represent a lower WTP because the respondents are not currently deriving utility from watching the team. The out-of-season WTP estimates may be viewed as a lower bound on the WTP, and the fans' in-season WTP (contained in Appendix A) may be viewed as an upper bound on the WTP.

    A similar approach was employed by Johnson and Whitehead (2000) to investigate the public-good aspects associated with building a new basketball stadium for the University of Kentucky Wildcats and a minor league baseball stadium in Lexington, Kentucky. One might argue that college teams are not capable of relocating. Thus the threat of losing the team is not as credible as in the case of a professional team that is for sale. This phenomenon may have impacted the WTP valuation. The Johnson and Whitehead paper uses the payment card format, which typically results in a more conservative estimate of WTP. We use a dichotomous choice elicitation format that may result in a larger WTP value than if we had used the payment card format. We use the dichotomous choice format because it has been shown to be incentive compatible and easier to answer (Boyle and Bishop 1988). (3)

    We hope to learn more about the WTP for a stadium when the threat of relocation is credible, as it was with the Minnesota Vikings at the time of our survey. We also conducted our survey during the off-season to mitigate the biases that may come from the latest victory or defeat. We draw upon the recreational demand literature from environmental economics to include travel cost measures of expenditures by respondents who watch games at the stadium or on television. Finally, the scope of this survey is much larger than previous studies, with about half of the surveys being sent to nonmetropolitan households.

    We begin with a brief description of the literature addressing the connection between credibility and WTP. Following that, we present our survey methodology and sample characteristics. Then we proceed to a description of the CVM methodology and the "naive" empirical model not treating the uncertainty in team relocation. Next, we present the empirical results for this naive model. After that, we update our model to account for uncertainty in team relocation and include a section that models the respondents' credibility beliefs. Finally, we empirically estimate our revised random utility model with prior-determined relocation beliefs and develop our conclusions from this study. Appendix A contains a description and analysis of a data set gathered by on-site interviews with Vikings fans outside the stadium. These results are provided for comparison in Appendix B.

  2. Credible Threat of Relocation and WTP

    One of the biggest criticisms of CVM surveys is that if respondents do not find the scenario to be credible, then the responses lack meaningful information about the resource being studied (Diamond and Hausman 1994). This is a key methodological issue faced by all practitioners of CVM. In our survey, more than 50% of the respondents state that they believe the Vikings would move if the team did not get a new stadium. Our WTP estimates are also much higher than those obtained for similar scenarios. The lessons from this survey may be used to benefit other CVM surveys where timing is critical, as well as to model the respondent decision-making mechanism under uncertainty.

    This idea is separate from the nomenclature of biases described at length in the work of Mitchell and Carson (1989) and in pieces like the recommendations of the National Oceanic and Atmospheric Administration (NOAA) panel (Arrow et al. 1993). Our ideas deal mainly with the timing of a survey as it pertains to the information about the issue that is currently available. Early scholars have pointed out that it is important for respondents to understand the choices in the scenario exactly as the investigators intended them (Mitchell and Carson 1989). Our contribution to the literature is much more fundamental than "scenario misspecification." Basically, we deal with timing issues that speak to the heart of scenario credibility. If the respondent did not believe that the Vikings would move, then the valuation of the team would be substantially different...

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