Hey Buddy...Want to Buy a Dollar?

I used to teach regulatory theory and practice for the World Bank and USAID.  Whether I was in Zambia, Tanzania, Nigeria or Eastern Europe, I always got things started by playing a game.  I took the local unit of currency that was worth a couple dollars and I auctioned it to the crowd.  The only rule is that you have to honor your bid...that means if you bid 25 cents for a dollar and lose, then you still owe me 25 cents.  But you have the chance of getting a dollar for a quarter, so there's a lot of upside. 

So the bidding starts at a dime and I usually have a couple bidders.  Then someone bids 15 cents and he's ahead.  The bidding will ratchet up pretty quickly from there.  You would think that the bidding would stop at about a dollar.  After all, who would pay more than a dollar in order to get a dollar? 

That's when the "honor your bid" rule kicks in.  If you have bid 75 cents and the other guy bid 80 cents, then you still owe me 75 cents--so you might as well bid a dollar.  But then the guy who bid 80 cents still owes me 80 cents.  So he might as well bid $1.05.  Sure, it's over a dollar, but he only loses a nickel if he wins the bid.  As it stands right now, he's going to lose 80 cents.  So what happens when he bids $1.05 for a dollar?  Well, the other bidder who was going to win with a 90 cent bid is now going to lose 90 cents.  So he bids $1.10.  That way if he wins the dollar, his loss is only 10 cents.  Of course, your loss is now $1.05...so it's rational for you to bid $1.15.

Eventually, the bidders realize that the only way to win is to quit and cut their losses.   At that point, the "winner" will give me, say, $1.50 and I will give him a dollar so his loss if 50 cents.  The other bidder will give me, say $1.40 and get nothing.  The only way to win the game is not to play. 

Why do I play this game with government officials in Africa and Eastern Europe?

So they won't build stadiums.

The idea seems so good....  Sports teams bring in a lot of revenue, so if we can invest a little bit of money, we can bring a sports team into town and generate much more revenue than we have to spend.  That's the same as bidding 15 cents for a dollar.  And if no one else bids, we will do really well.

So we "win" the bid and build a stadium.  Life's good, for a little while and then someone else realizes that they can also make a lot of money if they build a stadium and lure the team to come to them.  So they offer to build a nicer stadium and throw in signage and parking etc. 

That's the equivalent of someone else bidding 30 cents when we have bid 15 cents.  What should we do?  After all, if the team leaves, we still owe the money on the stadium, and if we upgrade the facility, or throw in cash, we are still making money.  Essentially, we are now bidding 70 cents for a dollar. 

The stadium bidding war plays out exactly like the dollar bidding war.  That's because someone will out bid our 70 cents.  They will do so for two reasons.  First, they can still bid less than a dollar in order to get a dollar, but perversely, they are in the same position that we are if they lose...they still owe on the debt. 

But surely the stadium game doesn't really play out like the dollar game?  No one going to actually pay more than a dollar to get a dollar? 

Ladies and Gentlemen, I present to you Glendale Arizona...Here's today's Republic, practically begging the Goldwater Institute not to sue Glendale over its fateful decision to build an entire sports complex in order to lure the Phoenix Coyotes.

Keeping the Coyotes is important to metropolitan Phoenix. It is important, certainly, for the jobs that would be lost and for protecting the enormous investment of businesses in Glendale, which extends well beyond the hockey team itself. An entire commercial sector of Glendale has been devoted to sports and entertainment. Losing the Coyotes from this mix would be devastating to those businesses.

Glendale is in the position of bidding $1.50 in order to cut its losses to 50 cents.  If you think this is the only example, look at Spring Training...not only does the Grapefruit league try to out bid the Cactus league, but Scottsdale tries to outbid Mesa...which in turn tries to outbid Tucson. 

The only way to win the incentive war is to not play.  That's why the founders of our state made it illegal for the government to give incentives to businesses. 

So Glendale wants to make another bid in order to cut its loses.  If Glendale loses the bid and the Coyotes leave town, then Glendale will be left holding the debt. 

Now Glendale and the Republic are begging Goldwater not to sue...just let us bid one more time to cut our losses.  But the game was rigged from the beginning.  The game ends in bankruptcy.  That's why the Constitution stops politicians from playing the game.

Sue them Clint!.  Enforce the Constitution.  The cities will never learn not to bid for a dollar.  That's because it takes so long for the game to play out that the initial bidders are gone.  Glendale has already lost the game.  It's time to enforce the Constitution so that others won't fall for the same trick.

Comments

[Surprised]

Clever game - I'm a sucker for little economics games that illustrate bigger realities. Is your Gladwell reading rubbing off on you? Great post.

[Bill]

Not often I agree wholeheartedly with one of your posts, but you really nailed this one. Good one.

[AllUsBadGuys]

So solid Greg!

[Craig]

I bid $0.05 for this post!

[Greybeard]

Awesome post, but as you show for many central planner types that frequent city halls, a tax dollar is not worth as much as a private dollar. You see, using $1.50 in tax "revenue" to generate $1 in private sector "transactions" means that the $1 will be spent over and over within the local private sector, and taxed through local sales tax each time until it's gone. So the city actually ends up with the entire $2.50, but only if they can figure out a way to keep all those transactions local. Building a stadium is perfect.

[Dr. Lao]

They are going to have to find a new name for the arena soon. Jobing.com is in dire financial shape and may shut down soon.

[Jack]

The UofP name may have to come of the Stadium too, based on the latest federal regulatory actions.

[English taobao]

I just get all worked up , and I stew around!

[Mark Smith]

Keep preaching it, Patterson! There is too little of this viewpoint going around. People are quick to see that big sports complexes bring in some revenue, but it's harder for folks to understand the depth of the obligation these bring.

The recently-approved Mesa stadium has a clause requiring the city the make sure the stadium remains one of the top-facilities in the Cactus League. In other words, a contractual obligation to continually up its bid.