Economics, Economic Freedom and the Olympics – An Economist Writes Every Day

0

The Olympics have started. Is there anything economists can say about what determines a country’s medal count? You may not think so, but the answer is clearly yes! In fact, I will say that both the average economist and the average Politics economist (in the sense of studying political economy) have something worth saying.

Why couldn’t they? After all, investing effort and resources to earn medals is a production decision, just like using labor and capital to produce cars, computers, or baby diapers. Indeed, many sports cost thousands of dollars in equipment each year – a cost to which must be added training time, lost wages and training. Athletes also gain something from these efforts – higher income after career, prestige, monetary rewards per medal offered by the government. Thus, we can set up a production function of Cobb-Douglas form

Or NOT is the population, Yes is total income (i.e. GDP), A is the institutional quality and J is the number of medals won. The index I and you represent medals won in any country at any Olympic event. This spec above is a twist (because I’m changing the term A’s meaning as we shall see below) on a paper in the Review of Economics and Statistics published in 2004 by Andrew Bernard and Meghan Busse.

The intuition is simple. First, we can assume that Olympic-level performance abilities require some innate skill (eg, height, leg length). The required level is a absolute level. To see this, think of a normal distribution for these innate skills and draw a line near the far right tail of the distribution. Now the size of a country is directly related to this straight tail. Indeed, a small country like Norway is unlikely to have many people who are above this absolute threshold. In contrast, a large country like Germany or the United States is more likely to have a large number of competitors. It is the logic of NOT being included.

What about Y? This is because innate competence is not all that determines Olympic performance. Indeed, innate skills must be developed. In fact, if you think about it, athletes are less artists who spend years perfecting their art. The only difference is that this art is immensely physical. The problem is that many of the training costs for many (not all) occupations are roughly uniform across income levels. Indeed, many of the goods used for training (e.g. skis, hockey sticks and pucks, golf equipment) are traded internationally so that their prices converge from one country to another. . This tends to give countries with higher income levels an advantage, as they can more easily afford to devote resources to training. This is why Norway, despite its small size, is able to be so competitive – its fairly high level of per capita income makes it easy to invest in developing sporting ability and innate talent.

Bernard and Busse confirm this intuition and show that yes, the levels of population and development are strong determinants of the number of medals. The table below, taken from their article, shows this.

What about A? Normally, A is a scalar that we use in a Cobb-Douglas function to illustrate the effect of technological progress. However, it is also frequently used in the economic growth literature as a proxy for institutional quality. And if you look at Bernard and Musse’s article, you can see institutions. Notice the line for Soviet? Why would it matter to be a Soviet country? The answer is that we know that the USSR and other communist countries have invested considerable resources in winning medals as a propaganda tool for the regimes. The variable Soviet represents the role of the institution.

And this is where the political economist has many to say. Consider the decision to invest in developing your skills. It is an investment with a long period of maturity. Athletes train for at least 5-10 years to even compete in the Olympics. Some athletes have been training since adolescence. Not only is it an investment with a long maturity period, but it pays little if you don’t earn a medal. I know of a few former Olympians from Canada who hold positions whose level of prestige and level of income are not statistically different from those of the average Canadian. Only athletes who have won medals get the free endorsements, sponsorships, concerts, speaking tours, and gift bags (people tend to reject these, but they’re often worth thousands of dollars). This long maturity and high variance in returns deters investing in the Olympics.

At the margin, the insecurity of property rights reinforces the deterrent effect. Indeed, why invest when your property rights are not secure? Why invest if an executive can take the income from your investment or tax it at a level punitive enough to deter you? In an article published in Journal of Institutional Economics together with my friend Vadim Kufenko, I discovered that economic freedom was a determining factor in the medal count. Vadim and I have argued that secure property rights—one of the components of the Economic Freedom Indexes—make it easier for athletes to secure the gains from their efforts (see chart below).

Two other articles, one by Christian Pierdzioch and Eike Emrich and the other by Lindsay Campbell, Franklin Mixon Jr. and Charles Sawyer, also find that institutional quality has a significant effect on the number of medals won by countries. Another article, this time by Franklin Mixon and Richard Cebula in the Sports Economics Journal, also argues that the effective property rights regime in place for athletes creates incentives that essentially increase the supply of investment in athletic skill development. The general conclusion is the same: the number of Olympic medals largely depends on the quality of the institutions in the athlete’s country of origin.

In other words, the country most likely to win a ton of medals is the economically free, rich and populous country. That’s it!

Share.

Comments are closed.