Appropriate and Inappropriate Uses of Economic Impact Studies

1. Appropriate and Inappropriate Uses of Economic Impact Studies Christopher Jepsen, Univ. of Kentucky Anna Stewart, Univ. of Kentucky Paul Coomes, Univ. of Louisville

2. Introduction • Economic impact studies are popular and valuable tools for estimating effects of a variety of entities: • New businesses • Existing business (ex: university) • Sporting events such as America’s Cup, Breeders’ Cup, Super Bowl, etc. • Business or base closures

3. Complexity of Impact Studies • Economic impact studies have a lot of important, but not very exciting, assumptions that need to hold in order to produce valid impact estimates • Many studies provide little if any information on whether these assumptions hold

4. Impact Study Overview • Direct effects • Example: wages of workers at firm • Indirect effects • Example: increased employment for vendor • Induced effects • Example: spending in local economy by employees of vendor

5. Underlying Assumptions • Important to clarify geographic area under study • Need to be consistent and careful • Role of prices • In their simplest form, impact studies assume that prices do not change • It is challenging to model changes in prices, although it can be done

6. Examples – Appropriate Uses • Economic impact of proposed tourist information and conference center • Economic and quality of life impact of Pine Mountain Trail Project • Economic and fiscal impact of distilling industry in Kentucky • Economic impact of 1999 Breeders’ Cup race

7. Possibly Appropriate Uses • Military base closure • What are possible future uses for base? • Are indirect and induced effects from contraction similar to those from expansion? • Large sporting event • What would hotel occupancy, etc. be like at that time of year without event? • To what extent are attendees local, within state, out of state, or international?

8. Likely Inappropriate Uses • Large public university or community college • Most funding is from taxes and tuition and is not “new” to the area • Economic benefits are complex and hard to measure • Counterfactual does not make sense • Entire industry • Again, counterfactual likely makes no sense

9. Alternate Methods • When traditional impact study is not appropriate, alternate methods are needed even if they are complex and expensive • For example, could study economic value of university or community college system through contingent valuation survey method

10. Summary • Economic impact studies are popular and valuable tools for measuring economic effects • However, they are based on many assumptions that need to be satisfied in order to produce meaningful estimates • When these assumptions are not satisfied, other approaches need to be used