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The Economics of Gambling

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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


1
The Economics of Gambling
  • Melissa S. Kearney
  • University of Maryland
  • Presentation to Economic Student Association
  • March 6, 2008

2
Introduction
  • 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
    commonplace.
  • 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
    decision-making

3
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?

4
Gambling in America (Gallup, 12/2007)
5
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
    adults.
  • No difference between college graduates and
    nongraduates.
  • Significantly related to household income
    higher-income 72 middle-income 66
    lower-income 55.

6
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.

7
Gambling Industry 2003 Gross Revenues
8
A Controversial Industry
9
Casinos
  • 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.

10
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)

11
Debate on casinos Claims against
12
Debate on casinos Claims in favor
13
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
    well-understood.
  • 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.

14
State Lotteries
  • Lottery ticket sales totaled 41.4 billion in
    2003, yielding gross revenues for states of 19.9
    billion.
  • 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.

15
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
    Indiana.

16
Debate on state lotteries Claims against
17
Debate on state lotteries Claims in favor
18
State lotteries Unresolved issues
  • Distributional consequences of state lottery
    revenue.
  • 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?

19
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.
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