No spectacle in sports compares with the Indy 500. Every year, hordes of race fans descend on Indianapolis, soaking up beer and filling every available hotel room. As economists, we can’t help but marvel at all the economic activity. But neither can we refrain from rolling our eyes at exaggerated claims about the race’s benefits to the local economy.
A frequently cited study estimates the Indy 500 generates total economic impact of $336 million. That’s more revenue than any other sporting event—including the Super Bowl. When the media reports this number, it sounds like Indianapolis is getting rich off the race. But closer scrutiny reveals the actual economic benefits are far less.
The problem with the economic impact studies is, they report revenue but not costs. The revenue for hotel rooms, restaurants and so on are often mistakenly deemed as benefits. But benefits must be considered as revenue minus costs.
To illustrate the error, imagine that a hotel rents all 100 rooms at a rate of $300 a night, for three nights, over race weekend to visitors attending the Indy 500. That’s $90,000 in revenue for the hotel for the three days. But the hotel would have rented many of its rooms if the Indy 500 never took place. The benefits to the hotel are the additional profits, from higher occupancy and higher room rates, attributable to the race. Claiming that the hotel’s benefits are $90,000—because that’s its revenue during race weekend—vastly overestimates the benefits.
A new research study by E. Frank Stephenson of Berry College estimates the economic benefits the Indy 500 generates for Indiana’s hotel industry. Using careful statistical analysis, he estimates that the race generates $6.5 million in additional profit for hotels. That’s nothing to scoff at, but it’s a fraction of hotel revenue during the race.
Half the job of an economist is to point out that anything that has benefits also has costs. The Indy 500 brings in tourists, but other conventions and tourists get crowded out during race week. Once that is considered, the additional economic benefits generated by the Indy 500 turn out to be fairly small. And besides, most of these additional benefits don’t stay in Indiana. Most hotels are owned by a worldwide pool of shareholders—so the benefits accrue mostly to residents outside Indiana. Not that that’s a bad thing.
So let’s love the Indy 500 but recognize it’s no golden goose.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.