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The Economics of Gambling


The Economics of Gambling. Melissa S. Kearney. University of Maryland ... No strong evidence that riverboat casinos (mostly in midwest) generate economic growth. ... – PowerPoint PPT presentation

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Title: The Economics of Gambling

The Economics of Gambling
  • Melissa S. Kearney
  • University of Maryland
  • Presentation to Economic Student Association
  • March 6, 2008

  • Gambling is quite common among Americans 2 out
    of 3.
  • In past three decades, legalized gambling in the
    U.S. has grown from very limited to extremely
  • Some form of gambling now legal in every state
    except HI and UT.
  • 42 states currently run state lotteries.
  • Size, scope, and legality of gambling determined
    by government.
  • Lots of interesting economic questions!
  • Public economics - social costs/benefits
  • Optimal regulatory/legal
  • Theoretical/behavioral questions about individual

Plan for this talk
  • Who gambles in the U.S.
  • Overview of the (legal) U.S. gambling industry
  • Public debate claims and evidence
  • casinos
  • state lotteries
  • Concluding remarks why do people gamble?

Gambling in America (Gallup, 12/2007)
Gambling in America (Gallup, 12/2007)
  • 65 of Americans report participation in at least
    one form of gambling last year.
  • 67 of men versus 63 of women.
  • Modest differences by age 59 of older adults
    65 69 of middle-age adults 66 of younger
  • No difference between college graduates and
  • Significantly related to household income
    higher-income 72 middle-income 66
    lower-income 55.

National Studies, 1975 1999
  • Adults who have never gambled 1 in 3 in 1975 to
    1 in 7 in 1999.
  • Gambling expenditures 0.30 of personal income
    to 0.74.
  • Lotteries and casinos are now the most common
    forms of gambling.
  • Past-year lottery participation has doubled
  • Past-year casino participation more than doubled.
  • Past-year bingo declined by 2/3.
  • Past-year horserace betting declined by ½.
  • Gambling patterns among women have grown more
    like those of men.
  • 1999 - Pathological and problem gamblers
    estimated to comprise about 2.5 percent of adults.

Gambling Industry 2003 Gross Revenues
A Controversial Industry
  • Rapid growth!
  • 1978 - Atlantic City, NJ joined Nevada as only
    jurisdiction in country to offer casino gambling.
  • 2003 - casinos operated legally in 37 states.
  • 391 commercial casinos operating in 15 states
  • Commercial casino revenue in 2003 28.7
    million 3X increase since 1990.
  • 356 Native American casinos, operated by 222
    tribes, in 30 states.
  • Indian casinos 16.2B in 2003 only a handful of
    tribes 20 years ago
  • Background on Indian Casinos
  • Indian casinos independent of regs and taxes on
    traditional businesses.
  • 1988 Congress passed the Indian Gaming Regulatory
    Act (IGRA) - upheld sovereignty of tribes over
    their own development, but recognized limited
    regulatory rights of states.

Casinos and public revenue
  • Direct effect Casinos subject to taxation
  • Tax rates on casino revenues range from 6.25 in
    NV to 35 in IL.
  • Taxes on casinos are not an important source of
    public sector revenues for most states only
    Nevada is heavily dependent on tax revenue from
    casino gaming.
  • Non-Indian casinos paid over 2 billion in taxes
    to states on gaming revenues in 1997, compared to
    state lottery revenues of approximately 10B in
    the same year (Eadington, 1999).
  • Re Indian casinos - states cannot tax the
    profits of tribal businesses compacts with
    states. Variation across states!
  • Indirect effects
  • Could increase other forms of tax revenue (if
    they generate additional business)
  • Could decrease other forms of tax revenue (if
    they canabalize other business)

Debate on casinos Claims against
Debate on casinos Claims in favor
Casinos Unresolved issues
  • Future research is needed into the nature of the
    heterogeneity of effects. Casinos vary greatly in
    size and scope.
  • Distributional impacts are also not
  • Optimal design of state-tribe compacts.
  • Do revenue payments exceed foregone tax revenue?
  • What about getting tribes to internalize
    externalities on neighboring communities?
  • Efficiency costs associated with the established
    market structure monopoly costs.

State Lotteries
  • Lottery ticket sales totaled 41.4 billion in
    2003, yielding gross revenues for states of 19.9
  • This represents annual average sales of 212 per
    adult living in a lottery state, or 372 per
    household nationwide.
  • NH first in 1964 geographical spread
  • By 1998, every continental state without a
    lottery bordered at least one state with one,
    making out-of-state lottery gambling feasible for
    a sizeable number of adults.
  • Most recent ND and TN in 2004, NC in 2005
  • Types of games On-line Pick 3 or 4 state
    jackpot multi-state jackpot Instant games
    (offered by every state lottery now) Keno/VLT
  • sales on instant lottery games account for almost
    half of all state lottery revenue.

State lotteries and public revenue
  • All states have monopoly over lottery.
  • On average, a dollar wagered on a state lottery
    game returns about 50 cents to players as prizes
    and 30 cents of profit to the state (the rest to
    admin costs).
  • Modest contributions to state budgets
  • 2001 avg of 0.71 across states
  • Ranged from 0.28 in MT to 8.27 in DE.
  • Of the 42 state lotteries
  • 19 earmarked in total or part for education
  • 11 to general funds
  • Other broad uses parks and recreation, tax
    relief, economic development
  • Some specific uses Mariners Stadium in
    Washington, police and fireman pensions in

Debate on state lotteries Claims against
Debate on state lotteries Claims in favor
State lotteries Unresolved issues
  • Distributional consequences of state lottery
  • Intra-family externalities if family is not a
    unitary model, potentially negative externalities
    in spending decisions.
  • Market structure reduction in consumer surplus
    from monopoly.
  • Market competition across states race to the
    bottom, e.g. VLTs in border counties.
  • Advertising and promotion are states protecting
    consumers? And if not, why monopolists?

Why do people gamble?
  • Misinformed of odds
  • Entertainment
  • Risk-loving
  • Risk-averse (decreasing MU of wealth), but
    perhaps w/ a convex segment in the middle
    trying to reach a new level/life!
    (Friedman-Savage utility, 1948).
  • Loss-aversion (Kahneman-Tversky) gamble to get
    back up to your reference wealth level.