A New Way to Pay for Stadiums?

There is a well known problem with building stadiums. Simply put, it’s a losing proposition for cities, and a way for team owners to bilk the public out of tax funds that could be better spent elsewhere. On the other hand, is it really fair to tell cities and fans that they can’t try to lure team to come — or stay — by building new stadiums?

Thankfully, Alex Tabarrok has a proposal that I think fits the bill, with some adaptation, called “Dominant Assurance Contracts.” Think of it as a kickstarter for public goods, with an extra safety net. Basically, someone puts up a starter fund for a project that enough people want, and pledges that money, irrevocably. Everyone else then decides if they also want the project to happen. If they do, they make a kickstarter-like pledge of a fixed amount, with a special bonus; if the project doesn’t succeed, the people who put money in get paid extra, from the starter fund — a fixed amount of that fund is distributed to everyone who pledged, if the project doesn’t get funded. It’s a sort of a compensation for the losers, who are now actually winners.

This has a clever component, which involves some fairly light game theory. Basically, it’s about solving the free rider problem; people don’t contribute, but they still benefit if the project happens, so they “free ride.” If this happens too much, people feel like suckers for paying, more start to cheat, the system runs out of money.

Here, there’s an incentive not to let that happen; if the project fails and you didn’t contribute, you don’t get paid. So if you’re unsure the project will happen, you can bet on it, and win either way. People who want the project to happen can free ride, but if the system has too many free riders, it’s now (somewhat) self-correcting. And taking a page from Kickstarter, I think the dynamic can be further improved.

How would this work for stadiums? There are a couple options, and I’ll outline one of them. But first, it’s worth noting that now, stadiums are usually financed by public bonds, which allows the city or state to pay for the stadium upfront, and use tax revenue for the next 20, 30, or 50 years to pay off the bond. Sports teams then pay only 10% of the overall cost for a stadium from revenue, as a way to circumvent the requirement that no more than 10% of the cost can be paid for by revenue from the project.

Stadium Assurance Contracts, Part 1

One possible use for a Dominant Assurance Contract, is to let the team pledge a couple percent of the cost. The city, or the sports team, can then decide how many people it thinks will pledge to build the stadium — and people who pledge can be given something, such as season tickets, if they pledge.

Let’s consider a brand new, top of the line 75,000 seat football stadium, which costs about $1 billion. The city agrees on the minimum for the team to put up, say $15m, and the public gets a chance to pay for it — on a voluntary basis. The difference here is that teams can run a kickstarter; work out the prices so that if the team can get 15,000 fans to commit to pay for NFL season tickets for the next 30 years, at an average of $2,000/year, the stadium is paid for. (Don’t worry, season tickets for the really good seats already cost $3,000–$4,000, and those are likely the ones that people will want to reserve.)

That’s effectively a bond that pays out football tickets instead of coupon payments, paid for by the team out of their revenue, which pre-sells the seats to pay off the cost. Buyers can always sell their multi-season tickets, potentially at a profit — it’s like a bond. And if the team wants to move before then, it can refund the pledgers the remainder of their commitment — and pay for the remainder of the stadium itself.

In this setup, the team won’t risk their funds if they aren’t sure the fans will pay for them to stay. If the fans and investors don’t see the stadium built, they’ll get an average of about $1,000 each in payout — quite an incentive for simply pledging to buy tickets if the stadium is built. More, if the team can’t find enough fans to pay for a stadium, the team is out quite a bit of money — so they’ll need to rally their fans to support the stadium.

Of course, we’ll need a way to convince the cities that this is a better idea than continuing to give in to teams that want public funds — an uphill battle. But if we got cities to try it, it might keep fans, politicians, and economists all happy — and help . And best of all, neither the Giants fans nor the Jets fans will need to help pay taxes for the other team’s stadium.

PS. Thanks to Kevin Chlebik and Jim Stone for their thoughts on the idea — and if anyone else has suggestions, I’d love to hear them here, or on Twitter.