The Economics of Gambling

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The Economics of Gambling

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

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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

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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?

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Gambling in America (Gallup, 12/2007)
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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.

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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.

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Gambling Industry 2003 Gross Revenues
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A Controversial Industry
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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.

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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)

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Debate on casinos Claims against
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Debate on casinos Claims in favor
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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.

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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.

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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.

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Debate on state lotteries Claims against
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Debate on state lotteries Claims in favor
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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?

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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.