Fest Mgmt & Evnr Tour, Vol. 2, p. 33-43Cl Cognizant Comm. Coxp. 1994, Printed in the USA 1065-2701194 $5.00 + .00 MEASURING THE ECONOMlC IMPACT OF FESTIVALS AND EVENTS: SOME MYTHS, MISAPPLICATIONS AND ETIflCAL DILEMMAS JOHN L. CROMPTON AND STACEY L. MCKAY* Communities may invest tax dollars or various hired to conduct the study. However, consultants are types of in-kind public assistance into festivals and hired in large measure to tell their clients what they events for many reasons, but economic benefits are want to hear, "And what they want to hear is that likely to rank consistently high among them. They their event is going to generate a lot of money" anticipate an event will attract visitors from outside (Dunnavant, 1989). Curtis (1993) offers an analogy: the area whose expenditures while they are there "They are in truth the exact equivalent of an expert represent an infusion of new wealth into the com- witness in a lawsuit who comes to testify in support munity. A scarcity of tax dollars has led to increas- of the side that is paying the expert's bill. An ex- ingpublicscrutinyof theirallocation.In thisenvironment, pert whose testimony harms his employer's case producing an economic impact study to demonstrate doesn't get much repeat business." The same com- that economic returns to a community will exceed mentator suggests, "The fees for the study are like its investment has become almost a DE RIGUEUR re- a religious tithe paid to a priest to come bless some quirement for event organizers. Economic impact is endeavor" (p. 7). defined as the net economic change in a host com- An executive of a major consultancy that con- munity, excluding non-market values, which results ducts economic impact studies observed that if "you from spending attributable to the event. pick five consultants, you'll get five different num- Often, these studies are not conducted impartially bers." Similarly, a partner in a major accounting or objectively. Rather they are mischievously con- firm who does these studies admitted, "It's a very cocted as advocacy documents. The political reality inexact science" (Dunnavant, 1989). The discrepan- of many economic impact analyses of events is that cies occur because economic impact analyses can be they are undertaken not to find the true impact, but conducted using different assumptions and proce- rather to legitimize the event's public support by dures, many of which are erroneous, which leads to endowing it with an aura of substantial economic dramatically different impacts being identified. Some- benefits. times the errors result from a genuine lack of un- If a study is conducted in-house, it is likely to be derstanding of the economic impact concept and tainted by some suspicion that its authors lack the procedures used to measure it, but on other occa- expertise to do it correctly, and/or that their vested sions they are mischievously used to deliberately interest in the event may influence presentation of mislead and generate large numbers. their findings. For this reason, external consultants, The purpose of this paper is to alert festival or- who appear to be both expert and neutral, are often ganizers to the most common sources of error in ·John L. Crompton and Stacey L. McKay are with Texas A&M University, Texas Agricultural Experiment Station. Department of Rec- reation, Park and Tourism Sciences. Delivered by Ingenta IP: 128.194.118.103 On: Tue,33 18 Aug 2020 19:55:10 Article(s) and/or figure(s) cannot be used for resale. Please use proper citation format when citing this article including the DOI, publisher reference, volume number and page location. 34 CROMPTON AND MCKAY economic impact studies. Data from a study under- leakage has taken place constitute the net economic taken by the authors is used to illustrate five of these gain. errors: (1) use of incremental rather than true multi- The multiplier process is shown diagrammatically pliers; (2) the use of sales rather than income multi- in Figure 1 (Liu and Var, 1982). It assumes that the pliers; (3) misrepresentationof employmentmultipliers; group of festival visitors spend their money at four (4) inclusion of local residents; and (5) failure to different types of establishments in a city. These exclude "time-switchers" and "casuals." The im- expenditures constitute the DIRECT economic impact pact each of these errors has on magnifying the real on the community. The figure shows the five differ- economic impact is demonstrated. The paper con- ent ways in which each of these establishments cludes with consideration of two other concerns could disburse the money it receives. The hotel is which, if they are not addressed, are likely to lead used to illustrate the process, but the pattern would decision-makersto overly optimistic conclusionswhen be replicated for each establishment. The three local reviewing results of an economic impact study. They depositories of funds receiving money in Round I are displacement costs and the costs of negative im- and in successive rounds that did not leak out of the pacts that accrue to a community as a result of stag- community, will continue to spend this money in the ing an event. same five ways. The visitors' initial expenditure is Data used in the paper were collected, using a likely to go through numerous rounds as it seeps multi-stage sampling procedure, from over 2,600 through the economy, with portions of it leaking out visitors to a 10 day festival comprised of multiple each round until it declines to a negligible amount. events in a large American city. Because it was a These subsequent rounds of economic activity are large city with extensive suburbs, the defined area termed INDIRECT impacts. for which the economic impact study was under- The proportion of household income (employees' taken was delineated as the county within which the wages and salaries) which is spent locally on goods city's boundaries were confined and two surround- and services is termed an INDUCED impact. This is ing counties which embraced the city's suburbs. The defined as the increase in economic activity gener- three counties essentially represented the integrated ated by local consumption due to increases in wages local trading area. If the study had been limited to a and salaries. The INDIRECT and INDUCED effects to- single county, the economic interrelationships be- gether are frequently called secondary impacts. Thus, tween city and suburbs would have been ignored the direct, INDIRECT and INDUCED effects all contrib- and results would have been less representative of ute to the total impact of a given injection of money economic impact on the area. by out-of-town visitors. Unfortunately, the multiplier can be expressed in several different ways and available input-output Use of Incremental Rather Than True Multipliers analysis computer software produce alternatives. For The multiplier concept is a central component of example, IMPLAN, which has emerged as the most economic impact analyses. It recognizes that when popular input-output model used to measure eco- visitors to an event spend money in a community, nomic impact in tourism contexts, produces both their initial direct expenditure stimulates economic Type 1 and Type III multipliers. The Type IT multi- activity and creates additional business turnover, plier captures induced effects by assuming a linear employment, household income and government rev- relationshipbetweenincome and consumptionchanges, enue in the host community. The impact of this in- but this multiplier is not available from IMPLAN. jection of outside money can be likened to the The Type II assumption is that an increase in output ripples set up in a pool if more water is poured into will raise income levels, and therefore increase house- the system (Archer, 1973). The pool represents the hold spending proportionally. Population is assumed economy and the additional water symbolizes extra to be stable. The result is an exaggeration in total spending by the outside visitors. The ripples show effect. To minimize the over-estimation that occurs the spread of money through the economy. Some of with a linear consumption function, the Type 1lI the money spent by visitors leaks out of the city's multiplier in IMPLAN estimates induced effects based economic system to pay taxes to, or buy goods and on the changes in employment and population. The services from, entities outside the city. Only those resultant multipliers are typically five to fifteen per- dollars remaining within the host communityDeliveredafter by centIngentasmaller than Type II multipliers (University of IP: 128.194.118.103 On: Tue, 18 Aug 2020 19:55:10 Article(s) and/or figure(s) cannot be used for resale. Please use proper citation format when citing this article including the DOI, publisher reference, volume number and page location. MEASURING FESTIVAL ECONOMIC IMPACT 35 Out-of-Town Visitor Spending INITIAL ••• ••• .•. INJECTION RESTAURANT HOTEL RETAIL FESTIVAL TICKETS OF MONEY AND CONCESSIONS J, .1. J, J, J, FIRST Local Direct Local Non-local ROUND Non-local Interindustry Household Government Government OF Leakages Purchases Income Revenue Revenue SPENDING J. J. Local Non-local Household Savings Household Purchases Purchases l ALL BUSINESSES J. J, J, J, J, SUCCESSIVE Local Secondary Local Non-local ROlJ~DS Non-local Interindustry Household Government Govenunent OF Leakages Purchases Income Revenue Revenue SPENDING .L J, Local Non-local Household Savings Household Purchases Purchases j. Figure 1. The multiplier process. Delivered by Ingenta IP: 128.194.118.103 On: Tue, 18 Aug 2020 19:55:10 Article(s) and/or figure(s) cannot be used for resale. Please use proper citation format when citing this article including the DOI, publisher reference, volume number and page location. 36 CROMPI'ON AND MCKAY Minnesota 1989).