2018 Archives

Commentary: Could landing Amazon also summon the winner's curse?

Excerpt

The following by SMU Senior Business Lecturer Michael Davis first appeared in the Feb. 8, 2018, edition of The Dallas Morning News.

February 12, 2018

By Michael Davis

Here are two things everyone in Dallas should share in common: 1) the fervent hope that Amazon picks our city as the site for its second headquarters, and 2) the firm conviction that signing Chan Ho Park as a free agent pitcher for the Texas Rangers was one of the worst deals in the history of baseball. Those two things may seem unrelated, but they're not.

Here's why.

Chan Ho Park played for the Los Angeles Dodgers between 1994 and 2001. For most of those years he was good, not great. But in 2000 and 2001 he was spectacular, winning 33 games over the two seasons and making the All Star team. At the end of the 2001 season he became a free agent and was able to negotiate with any major league team. In the off-season that followed, baseball lovers argued about whether the real Chan Ho Park was the slightly-better-than average pitcher of most of his career or the ace of the last two years.

Our Texas Rangers — led by a swaggering, optimistic rich guy named Tom Hicks — bet on the spectacular Chan Ho Park and signed him to a five-year contract that was almost the largest for that time in baseball. It was a bad bet. Park struggled with injuries and never even played up to his early standard. He had a losing record with the Rangers and was traded in 2005.

The saga of Chan Ho Park is a perfect example of what economists call the winner's curse. It's a simple idea. Imagine an auction with a number of people bidding on something that seems quite desirable. Some of the bidders will be cautious and place a conservative value on the thing up for bid. Other bidders will be big risk-takers with wildly inflated views of what they're trying to buy. Of course the risk-taking optimists are going to outbid the cautious conservatives. And because they paid so much, they will often be disappointed in their purchases. The winners will be cursed. 

Amazon has, in effect, announced it is a free agent and is soliciting bids from 20 cities that want the headquarters. Of course, Amazon isn't Chan Ho Park. Amazon has never had a bad season and there's no doubt the company would be a tremendous addition to any city. But there is still a great deal of uncertainty as to how valuable they're likely to be. There was much talk about the promise of "up to" 50,000 jobs. But what kind of jobs and when does the hiring happen? And what does the future really hold for Amazon? The only thing anybody knows about retailing is that it will be very different 20 years from now. (Think about the fate of Sears and the layoffs at Walmart.) Will Amazon be leading those changes or displaced by, well, the next Amazon?

Never mind. The bidding frenzy is white hot, with cities offering all sorts of goodies; things like tax breaks, infrastructure development, free land, worker training and more. As these numbers grow insanely big — some packages are said to be costing out as much as $7 billion — it's starting to look like vanity and emotion are driving things, not clear economic analysis.

So how do we avoid playing this sucker's game?

One important principle should be to refuse Amazon anything that we wouldn't offer to any other business. If Amazon gets tax breaks, then everyone gets tax breaks. If Amazon wants supporting infrastructure, good roads and public transit around its buildings, for example, then by all means try to give them what they want. But before we spend money, we should ask whether there's some other infrastructure need that is more important.

Toronto, also on the list of 20 finalists, appears to be doing just this. They have publicly announced that they are not going to offer Amazon any special tax breaks or other subsidies. What they are promising is to spend money on infrastructure development and workforce training. If Toronto does these things well — a big if, of course — then the entire community benefits, not just Amazon.

None of this is to disparage Amazon. It's a great company and would be a great partner for Dallas. But we have to be smart about how we get them. We don't want to suffer a winner's curse.

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