The Economics of March Madness

As the NCAA basketball tournament gets under way this week, it is not only the teams and players from the 68 schools in the brackets who are trying to win big. Millions of viewers at home are hoping to cash in, or at least have bragging rights for the year, by winning the office pool.

Then there are the 14 host cities for March Madness, which to varying degrees are anticipating economic boosts and a little national exposure by having their names painted in big block letters on the baselines of the courts during the televised games.

Dayton, Ohio, which hosts the first-round games on Tuesday, was so excited about having the opening games that it held a festival on Sunday featuring a parade, a four-mile race, and an Air Force flyover.

“We want to show the country that Dayton means basketball,” said Tim Wabler, vice president and director of athletics at the University of Dayton, in a press release.

Dayton got an additional publicity boost when it was announced last week that President Obama would attend one of the games on Tuesday, along with British Prime Minister David Cameron.

Host cities for NCAA tournament games expect to generate millions of dollars for local businesses and tax coffers from the events, according to Rick Horrow, chairman of Horrow Sports Ventures, a consulting firm for development of sports facilities.

“The communities that have a regional tournament can look forward to anywhere from $40 [million] to $80 million of economic impact during tournament week,” said Horrow, who was in El Paso, Texas, last week to explore the possibility of building a multipurpose facility that could attract events like March Madness to the city.

“The NCAA regionals allow the community to tell their positive story to the world.... It’s a catalyst for national recognition, business development, and the economic growth that follows as a consequence,” Horrow said.

Not everyone agrees that hosting games is a guaranteed gold mine. For New Orleans, the host of this year’s Final Four games, it’s just another big event.

“I see the net [financial] impact as fairly small,” said Allen Sanderson, a sports economist at the University of Chicago. “A lot of the activity is just substitution of one thing for another. The tournament may affect where people drink beer, but not how much beer they drink.”

According to Sanderson, the fact that the activities and events surrounding March Madness are concentrated in one area makes it “easier to quantify, but also easier to be misled,” since economic activity in other parts of the city may decrease during this time.

“I suspect that there is less economic activity in restaurants, malls, and movie theaters” during this time, Sanderson said.

Also, many cities—including El Paso and previously Oklahoma City—that have entertained the idea of building brand-new facilities to host these events quickly realized that the costs of new infrastructure must be taken into consideration.

The process of turning a multipurpose facility into a larger infrastructure expansion is much more complicated than, “If you build it, they will come,” many economists warn.

“I’m from a city [Oklahoma City] that spent $120 million to get an NBA team and the state kicked in another $60 million in taxes. If you’re lucky, the city doesn’t lose money on it,” said Jonathan Willner, an economist at Oklahoma City University.

The path to profitability centers on attracting new visitors without disturbing residents or regular visitors.

“When a lot of people see that March Madness is going to be in town, they don’t come,” because they don’t want to deal with the crowds, Willner said.

“What you want is an increase in visitors that is so significantly large that it will generate tax revenues [mostly from hotel and sales taxes] to cover those expenses,” he said. “You want to have a bunch of people to come in that wouldn’t normally come in, and spend a lot of money in the city that wouldn’t normally get spent.”

Another economic balancing act takes place during the tournament in workplaces across the country, albeit on a smaller scale: Many employees for the next three weeks will be torn between devotion to their favorite teams and their jobs.

“As an employer, trying to stop people from paying attention to March Madness—not having office pools, limiting Internet access, yelling at people for being on ESPN—is kind of silly because people are gonna do it,” said Eric Darr, provost and executive vice president of the Harrisburg University of Science and Technology. “It [March Madness] is a tradition.... I’ve been on the beach, on vacation, during March Madness and everyone is around the TV. We are fanatical about it.”

Darr recommends capitalizing on the passion surrounding the tournament to build office morale since attempting to stop people from watching it is a futile exercise.

“If you are in an office environment and you can take 30 minutes, I’d say condone it,” Darr said. “And do it in a limited way. Don’t take the whole day off.”

“Maybe for 30 minutes out of that particular day it gets in the way of productivity, but the long-term benefits of next week, the week after that, of now having better morale in the office, better camaraderie, better working relationships—all of that pays huge dividends with regards to productivity,” Darr said.