The Economics of the Olympic Games: Reconsidering Former Socialist Countries' Performance

This paper explores how a country can maximise its utility from the Olympic games when uncertainty exists in medal production. A theoretical model demonstrates how the value of medals, uncertainty in producing medals, a decision maker's attitutes towards risks and costs of producing medals affect the optimal number of medals and expected utility of a risk-averse decision maker. An application of the model shows that, as teh overall welfare level and, accordingly, investment in sports increase, the related risk premium decreases, which in turn reduces the difference between the eastern and western bloc countries' performances in the Olympic games. The difference int he performance is also supposed to decrease as the uncertainty in obtaining medals decreases and the cost of medal production increases. This phenomenon occurs even when the Eastern bloc countries attach higher values to medals than do the Western bloc countries. As a result, this study predicts that the out-performance of the former socialist countries in the Olympic games would have dissipated, even without the recent political and economic collapse of those countries, unless they had accelerated their distorted state-driven sport policies.