ECONOMIC ESTIMATION OF VALUE OF CULTURE

Andrej Srakar Faculty of Economics University of Ljubljana

Plan of presentation
Economic effects of cultural events Methods to estimate economic effects of culture and their critiques Ex-post econometric estimation how it is designed, what it shows, first results Value of culture and arguments for public support to the arts Economic model of non-use values and results Summary

Economic effects of cultural events

Seaman (2003): Total impact = Short-run spending impact (SRS) + Long-run growth impact (LRG) + Consumption impact (C) SRS: short-run net increases in economic activity, related to the net injections of new spending into the region as a direct consequence of the cultural asset Economic Impact Studies (EIM) LRG: long-run increases in productivity and economic development linked to the cultural asset Travel-cost method; Hedonic pricing C: consumer attributed value of the event Contingent valuation (CVM); Conjoint analysis & Choice experiments (Big) problem (Seaman 2006): can these effects just be added up? Arent they overlapping to some extent especially C and SRS?

Economic impact studies

Key question: 'How much would short-run economic activity decline in a specific region if X were no longer to exist?' (Seaman, 2003) Economic impact studies of art use economic indicators such as output, income, employment, revenue to local and state government, to assess the amount of direct, indirect and induced impacts of an art activity Main method: Keynesian multipliers (production, valueadded, employment) + ex-ante analysis

Economic impact studies

EIM gained influence in 1970s as an answer to different after-WW2 problems (Radich 1993): 1) art as new domain of state support (especially in the US); 2) growth of non-profit art sector; 3) public sector problems; 4) growing influence of private business sector Most influential studies - USA: 1977 report, Economic Impacts of Arts and Cultural Institutions: A Model for Assessment and a Case Study in Baltimore (Cwi and Lyall); 1983 study, The Arts as an Industry: Their Economic Importance to the New YorkNew Jersey Metropolitan Region (Port Authority of New York and New Jersey); Arts and Economic Prosperity I, II, III, IV (20022011, Americans for the Arts) EIM in Europe: Economy of Culture in Europe (KEA European Affairs 2006), regional studies (e.g. Denmark, Netherlands, UK, Finland, Latvia, Sweden, Lithuania, Poland, Slovenia); regular studies still being made (e.g. WIPO national studies) EIM in Slovenia: Economics of culture (CIC & Peace Institute 2003); Percent for art (Slovenian Sculpture Association & UMAR 2008); WIPO Slovenian study (URSIL & Faculty of Economics 2011)

Economic impact studies number of problems and critiques

Seaman 2003: 1) Spending diversion error: failure to subtract local sources and non-local uses of funds 2) Induced (ancillary spending) base error: attribution of all spending to cultural event 3) Multiplier (indirect impact) error: adapting multipliers to specific regions 4) Supply constraint (crowding-out) error 5) Ex post verification error 6) Policy interpretation (partial vs. general equilibrium) error Snowball & Antrobus 2006: 7) Defining the area of study 8) Including time switchers and casuals 9) Determining the size of the multiplier 10) Non - including non-market costs and benefits + 2 common problems of any input-output study: 11) Homogeneity of products 12) Linear structure of input-output coefficients

Economic impact studies final consideration

Seaman (2012): If the marginal value (MV) of another EIM study was $0 in 1987 (as noted by Seaman 1987), imagine how negative it must be now after thousands of additional studies!
(Of course, even if the social MV is low, the private MV is perceived as high, so since after the next global extinction event only roaches and EIM will survive (and probably CVM too), it is imperative to do such studies well. That will also increase the SMV above $0 again and can make it a useful policy tool in conjunction with others.)

The answer so far: contingent valuation methodology

CVM: A method of estimating the value that individuals attribute to nontradable goods or to some characteristics of tradable goods not revealed by the market mechanism Consists of asking directly selected samples of population in survey or experimental settings, what is their willingness-to-pay (WTP) / willingness-toaccept (WTA) for qualitative and quantitative increments / decreases in nonmarketed goods
CVA (compensating variation): V (p, y CVA, z1) = V (p, y, z0) EVA (equivalent variation): V (p, y + EVA, z0) = V (p, y, z1) Turning points for CVM: Exxon Valdez 1989 oil spill, NOAA panel NOAAs conclusion: that CV studies can produce estimates reliable enough to be the starting point of a judicial process of damage assessment, including lost passive-use values. To be acceptable for this purpose, such studies should follow the proposed guidelines. (Arrow et al., 1993)

But: severe problems of contingent valuation methodology

Number of biases and critiques (some of them from Venkatachalam 2004): - Disparity between WTP and WTA (willingness to accept) - Embedding or scope effect - Sequencing - Information effect - Elicitation effects - Hypothetical bias - Strategic bias - Benefit transfer - Microeconomic nature, not addressing the macro economic effects - Extremely expensive and difficult to perform (they are mostly infeasible in practice for any cultural organization)

Contingent valuation final consideration

Dilemma: Epstein (2003): The Regrettable Necessity of Contingent Valuation, Journal of Cultural Economics vs. Diamond & Hausman (1994): Is Some Number better than No Number?, The Journal of Economic Perspectives

Methods to estimate value of culture and their critiques - CVM vs. EIM in cultural economics
Seaman (2006): CVM and EIM as substitutes / complements Ibid: sometimes nave, overblown EIM can be best estimators of true value of the event! Frey (2005): cultural advocates vs. cultural academics Stutzer, Luechinger & Frey (2010), Frey (2012): life satisfaction approach

Seaman (2012): The existential threat from ex post verification econometric analysis

A simple solution ex-post econometric analysis

A somewhat different question: How much did the macroeconomic indicators change because of the event?
It is done ex-post, after the event It uses methodology which suffers from no additional economic problems (overblown results, hypothetical bias, micro vs. macro focus) It uses statistical data, measured under common methodology Results can be compared across events, regions, states It is not expensive and methodologically over-complex It can be used to study the characteristics that influence the economic effects of cultural events the most (in positive and negative manner)

Methods to estimate value of culture and their critiques - ex-post econometric analysis
A flourishing method in sports economics Starts: Baade & Dye (1988): Sports Stadiums and Area Development: A Critical View

Some findings Baade & Matheson (2004): Bidding for the Olympics: Fools Gold? The increase in economic activity attributable to the 1984 Los Angeles Olympic games, as represented by job growth, an estimated 5,043 full-time and part-time jobs using our model, appears to have been entirely transitory, however. There is no economic residue that can be identified once the Games left town The job implications for the Los Angeles and Atlanta Summer Olympic Games were fundamentally different Atlanta Olympics created between 3.467 and 21.767 full and part time jobs Humphreys and Plummer (1995) projected that the Olympics would create approximately 77,000 new jobs in the State of Georgia with 37,000 of those materializing in Atlanta.

Methods to estimate value of culture and their critiques - ex-post econometric analysis
Main methods used (and possible to use): Panel data analysis; Treatment/Response analysis (Difference-in-differences; Instrumental variables); Dynamic Panel, GMM and Time Series analysis
Seaman (2012): There is a virtual explosion of efforts to identify empirical tracks in the sand in local employment and tax revenue data following an event. A similar task might be tried in Maribor after the year ends to see if econometric equations that attempt to isolate the unique effect of being a Cultural Capital reveal both economically and statistically significant unique effects of this honor. In the sports literature, they almost NEVER find such effects.

Ex-post econometric estimation of effects of ECoC Maribor 2012, first results, tourism visits, all cities pooled
dependent variable: tevilo dependent variable: tevilo dependent variable: tevilo dependent variable: tevilo skupnih obiskov obiskov tujih obiskovalcev skupnih noitev noitev tujih turistov Coefficient t Coefficient t Coefficient t Coefficient t 48015,1 4,3292 *** 30369,4 3,5552 *** 144723 4,4548 *** 83410 3,8673 *** -14153,1 2853,32 2212,1 0,002832 -0,007106 0,284998 0,836224 -3876,75 7761,501 7776,382 7767,453 -0,8476 1,9602 * 0,448 -7569,06 3263,71 2407,74 0,001648 -0,008303 0,165596 0,919506 -3802,062 7612,124 7627,005 7618,076 -0,5865 2,2768 ** 0,5064 -65843,1 3712,62 7690,63 0,006901 -0,002997 0,697175 0,554396 -4199,57 8407,14 8422,022 8413,092 -1,5112 1,3103 0,8055 -32715,5 8077,58 5863,67 0,004102 -0,005824 0,413226 0,743623 -4080,577 8169,154 8184,035 8175,106 -1,1006 3,0317 *** 0,584

const EPK_dummy time_of_treat_ epk_time_dummy R-squared Adjusted R-square F (3, 301) p value of F Log-Likelihood Akaike Schwartz Hannan-Quinn

Ex-post econometric estimation of effects of ECoC Maribor 2012, first results, tourism visits, only Maribor
dependent variable: tevilo dependent variable: tevilo dependent variable: tevilo dependent variable: tevilo skupnih obiskov obiskov tujih obiskovalcev skupnih noitev noitev tujih turistov Coefficient t Coefficient t Coefficient t Coefficient t 48015,1 4,3292 *** 30369,4 3,5552 *** 144723 4,4548 *** 83410 3,8673 *** 43537,2 3,9255 *** 41354,1 4,8411 *** 60504,5 1,8624 * 69842,5 3,2382 *** 2853,32 1,9602 * 3263,71 2,2768 ** 3712,62 1,3103 8077,58 3,0317 *** 27944,4 0,006685 -0,004112 0,619118 0,603152 -3568,616 7145,233 7159,772 7151,065 19,1979 *** 27136,8 0,010028 -0,000732 0,931952 0,425674 -3499,969 7007,937 7022,477 7013,769 18,9308 *** 57388,9 0,0018 -0,00905 0,165894 0,919301 -3865,841 7739,681 7754,221 7745,513 20,255 *** 58201,9 0,005266 -0,005547 0,487006 0,691579 -3756,329 7520,657 7535,196 7526,489 21,8444 ***

const EPK_dummy time_of_treat_ epk_time_dummy R-squared Adjusted R-square F (3, 276) p value of F Log-Likelihood Akaike Schwartz Hannan-Quinn

Ex-post econometric estimation of effects of ECoC Maribor 2012, first results

Positive and significant effects on visitors to cultural events approx. 15.000 new visitors to each public theatre in the region, approx. 30 new visitors per show Positive results on incomes on firms, yet only in the city of Maribor No effects on monthly wages in any city considered No (or even possibly negative) effects on new employment
Strong warning: so far only preliminary results!! Yet: the results are significantly different from multiplier/EIM results

Value of culture
Total Economic Value (Peterson & Sorg, 1987): use + non-use values Non-use values (Snowball, 2008): values to people who, for whatever reason, might be non-users, but who are still willing to pay to preserve or support the public good Typology of values of culture: USE VALUE: price + part of buyers consumer surplus NON-USE VALUES: option, bequest, existence, prestige, educational (Frey & Pommerehne, 1989) + altruistic value, vicarious consumption (Bille Hansen 1997; Throsby 2001) CULTURAL VALUES: symbolic, historical, aesthetic, authenticity, spiritual, social (Throsby, 2001) + Cultural inherent values (Hutter & Shusterman, 2006)

Arguments for public support to the arts

Public goods argument: non-excludability + nonrivalry Externalities argument: Positive/beneficial vs. negative externalities Asymmetric information Market power argument (monopolies + similar arguments) Inequality in income Productivity lag / Baumols disease argument Merit goods argument Supply-side vs. demand-side arguments

Economics of donations
Samuelson (1954; 1955): Pareto inefficiency of private provision of public goods Warr (1982; 1983) + Bergstrom, Blume & Varian (1986): crowding-out in relationship 1:1 no help in direct fiscal redistributions in hope of achieving the Pareto equilibrium Andreoni (1989; 1990); Sugden (1984): other explanations for donors motives warm-glow altruism Brooks (2003): crowding-in can be possible under certain conditions (low level of public good provided)

BASIC MODEL
Samuelsons model: maxU ( x, G) Our model each user solves:

max Ui ( xi, G, G) Ui ( xi,0, G) s.t.gi G i G xi gi wi

Each non-user solves:

max Uni( xni,0, G) s.t.gni G ni G xni gni wni Ui ( xi, G, G ) : use value of the user Ui ( xi,0, G ) : non-use value of the user Uni( xni,0, G ) : non-use value of the non-user

MODIFIED MODEL
An added fourth, warm-glow component U(gi) Modified model each user solves: maxUi ( xi, G, G, gi ) Ui ( xi,0, G, gi )

s.t.gi G i G xi gi wi

Each non-user solves: maxUni( xni,0, G, g ni )

s.t.gni G ni G xni gni wni

Ui ( xi, G, G, gi ): use value of the user Ui ( xi,0, G, gi ) : non-use value of the user Uni( xni,0, G, g ni : ) non-use value of the non-user

Results
Non-use values act in two different directions: they cause inefficiency of the model (less donations, externality effect) and at the same time they cause more efficiency in the model (more donations, altruism effect) Yet always the externality effect predominates, therefore nonuse values always denote externalities in private provision of public goods Comparative statics: 1) users donations will almost always be higher than non-users donations; 2) if present, the crowdingout effect will be higher for the party with the higher level of donations; 3) crowding-in effect is possible under certain circumstances; 4) relationship of non-use values of the user and non-user has to be determined empirically Econometric results using previous contingent valuation study dataset confirmed the theoretical findings

Conclusion what was gained?

New method to estimate economics effects of cultural events: solution to decades of futile metodological discussions on EIM vs. CVM method Many new and open questions for research in the future: 1) Do cultural events really have the proclaimed economic effects?; 2) How large are they?; 3) On what do they depend upon? One of the first sensible economic models of non-use values, a step ahead in exploring this public economics concept New argument for public support / market failure in provision of a certain good: values argument if one finds existence of significant non-use values in the estimation of a value of a certain good, this is the proof of beneficial externalities and therefore necessary condition to consider (not to ensure!!) public support to provision of this good

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