Lottery mania: An Editor's view

The growth and transformation of state lotteries in the United States during the last half of the twentieth century has been dramatic. As lotteries have evolved into high stakes games of a pari-mutuel nature, states have come to rely on them as revenue generators. But lotteries have only limited ability to raise funds for government, and unintended social consequences derived from their growth and evolution may outweigh their revenue generating capacity.This a revision of a paper presented at the Fourth National Conference on Compulsive Gambling, June 3, 1989, Des Moines, Iowa.     

Can Demographic Variables Predict Lottery and Pari-mutuel Losses? An Empirical Investigation

Using data from the 2004 and 2005 Consumer Expenditure Surveys (CES) comprising of 15,000 respondents, this study examines two research questions. The first of these considers the demographic differences between households whose members lose money playing the lottery and/or engaging in pari-mutuel betting and those whose members do not lose money participating in such activities. The second assesses demographic differences among households whose members lose money playing the lottery and/or engaging in pari-mutuel betting. It was found that respondents living in money-losing households are slightly older, better off financially, more likely to be married or divorced, more likely to live in a state with at least one legal casino and more likely to live in the Northeast than respondents living in non-money-losing households. Among those living in money-losing households, the least wealthy and African American respondents are more likely to lose a higher proportion of their respective incomes purchasing lottery tickets and engaging in pari-mutuel betting than wealthier respondents and whites.     

On complexity and lotteries' evaluation – three experimental observations

We present experimental evidence suggesting that human subjects penalize lotteries for complexity. Our results contradict the assumption that human agents follow the discounted expected utility model in multi-period choice with uncertainty. In particular, we show that the buying price offered for an inferior, simple multi-period lottery may sometimes significantly exceed the buying price offered for a better, yet more complicated, alternative, when the lotteries are sold to a group of subjects in a first-price auction. We discuss the possibility to modify the existing models of choice to this “complexity effect”.     

GET OUT THE (COSTLY) VOTE: INSTITUTIONAL DESIGN FOR GREATER PARTICIPATION

We examine two commonly discussed institutions inducing turnout: abstention penalties (used in 32 countries) and lotteries rewarding one randomly chosen participant (as proposed on the 2006 Arizona ballot). We analyze a benchmark model in which voters vary in their information quality and participation is costly. We illustrate that both institutions can improve collective outcomes, though lotteries are a more effective instrument asymptotically. Experimentally, we provide strong evidence for selective participation: lab voters participate more when better informed or when institutionally induced. Lotteries fare better than fines, suggesting that they may be a useful alternative to commonly used compulsory voting schemes. (JEL C92, D72, D02)     

Legalization of lotteries in the 1980s

The decade of the 1980s has witnessed an explosion in legalized gambling. Most dramatic has been the growth of state-sponsored lotteries. The spread of these state-operated lotteries is the result of pressure for more revenues for state operating costs. Lotteries are viewed as a means of raising these revenues: In 1987, state-operated lotteries grossed over $12 billion in sales. Eight states had sales exceeding $1 billion (New York Times, 1988). Clearly, state lotteries have become big business. The purpose of this article is to describe the spread of lotteries in the 1980s and to note the minimal attention given to compulsive gambling in debates on lotteries.Mr. Braidfoot is General Counsel for the Christian Life Commission of the Southern Baptist Convention. He is the author ofGambling: The Deadly Game.     

The Effect of Recessions on Gambling Expenditures

This article examines the influence of the business cycle on expenditures of three major types of legalized gambling activities: Casino gambling, lottery, and pari-mutuel wagering. Empirical results are obtained using monthly aggregated US per capita consumption time series for the period 1959.01–2010.08. Among the three gambling activities only lottery consumption appears to be recession-proof. This series is characterized by a vast and solid growth that exceeds the growth in income and the growth in other gambling sectors. Casino gambling expenditures show a positive growth during expansions and no growth during recessions. Hence, the loss in income during recessions affects casino gambling. However, income shocks which are not directly related to the business cycle do not influence casino gambling expenditures. Pari-mutuel wagering displays an overall negative trend and its average growth rate is smaller than the growth in income, especially during recessions. The findings of this article provide important implications for the gambling industry and for local governments.     

Scratch cards in Portugal: a hidden threat

This letter aims to highlight a hidden threat in Portugal, scratch cards. Despite having highly addictive components, as compared to other gambling products, scratch card regulation is almost non-existent, possibly leading to an ever-growing multibillion industry. Vulnerable people are easily attracted and there are no strategies to prevent problematic use. Interestingly, however, scratch cards and other lotteries are exclusively provided by a non-profit state-owned organization supposedly promoting responsible gambling. This concern is presented as a starting point for raising awareness in the general public, scientific community and regulatory bodies, so that effective action can follow.     

UNDERPRICING IN PUBLIC LOTTERIES: A CRITIQUE OF USER-PAY AND ALL-PAY TARIFFS

A body of literature spanning from medical ethics to public economics has amassed regarding the rationing of underpriced public resources. This study investigates the effects of price on entry, individual and aggregate expected consumer surplus, and tax revenues in user-pay and all-pay (AP) lotteries. Comparative statics indicate that expected surplus may increase (decrease) as price increases (decreases) if entry is sufficiently responsive though entry in AP lotteries is inelastic at all prices. Further, the lotteries are shown to be outcome equivalent under revenue equivalency. Selected results are evaluated numerically with simulations performed across a broad class of distributions describing individual private values. ( JEL D45, D61, H42)     

Opposing the Lottery in the United States: Forces behind Individual Attitudes towards Legalisation in 1975

In the 1970s, opposition to the lottery started to fracture in the USA. This study examines causes of the fracture and historical factors that contributed to changes in individual attitudes towards legalisation. The opponents at the time held to traditional arguments against legalised lotteries—negative economic effects, costs to others and increased crime. Unlike the past, however, there was weak religious institutional opposition to lotteries. Individuals with a strong commitment to their religious affiliation were more resistant to pro-lottery arguments, but in most cases could be convinced to support the lottery. The pre-World War II generation remained steadfast against the lottery, but there was relatively greater support among the post-World War II generation. This study has examined the 1975 survey data using a logit model to predict future legalisation in states with large population samples. As expected, analysis of 1975 attitudes shows that states with low levels of opposition are likely to legalise lotteries earlier than states with high levels of opposition.     

An informationally parsimonious impartial observer theorem

In Harsanyi's impartial observer theorem, an impartial observer determines a social ordering of the lotteries on the set of social alternatives based on a sympathetic but impartial concern for all individuals in society. This ordering is derived from a more primitive ordering on the set of all extended lotteries. An extended lottery is a lottery which determines both the observer's personal identity and the social alternative. We establish a version of Harsanyi's theorem in which the observer is only required to have preferences on the extended lotteries in which there is an equal chance of being any person in society. Received: 19 June 1996 / Accepted: 30 December 1996     

Risk, complexity, and deviations from expected-value maximization: Results of a lottery choice experiment

Varying several parameters of single-stage lottery choice tasks we investigate the question which features of a decision task lead subjects to deviate from maximizing expected monetary value (EV). Despite small differences in EV between the two lotteries in the choice sets, the subjects on average chose the lottery with the higher EV in every task. Risk avoidance occurs, but not consistently over all tasks. Further results are that subjects prefer less complex lotteries over more complex ones, and that risk matters the more the less complex the decision task is.     

Gambling among lottery winners: Before and after the big score

The proliferation of state lotteries raises the possibility of increasing pathological gambling because large segments of the population are purchasing tickets. This study, based on a 50% response rate of million dollar winners in Ohio in 1986, indicates lottery winners spend relatively small amounts of money on tickets, did not appreciably increase the amount of money they spent on tickets after winning, and rarely engaged in other forms of gambling before or after they won. These data do not support the assumption that lotteries significantly increase the amount of compulsive gambling in our society, but the subject deserves further exploration.     

TESTING FOR EFFICIENCY IN LOTTO MARKETS

State-sponsored lotto games, because they are pari-mutuel and because jackpots with no winner are rolled over into the next drawing, present an excellent opportunity to test for market efficiency. Using data from Massachusetts, Kentucky, and Ohio, we investigate bettors' responses and test for weak-form efficiency. Lotto bets do not have positive net expected returns, thus weak-form efficiency exists. To evaluate strong-form efficiency we utilize the concept of a rational expectations equilibrium. We find that in general lotto bettors' decisions to play generate a level of sales that conform to their original forecasts of expected value.     

Harsanyi's impartial observer theorem with a restricted domain

In this paper we extend Harsanyi's impartial observer theorem by showing that the large domain of social lotteries can be significantly restricted – it is sufficient that the domain consists only of constant extended lotteries. Received: 27 December 2000/Accepted: 12 September 2001 We thank Simon Grant, Edi Karni, Atsushi Kajii, Ben Polak, Yemima Thompson and John Weymark for their comments and the Israel Institute of Business Research for financial support.     

Risky social choice with incomplete or noisy interpersonal comparisons of well-being

In this study, we develop a model of social choice over lotteries, where people’s psychological characteristics are mutable, their preferences may be incomplete, and incomplete or noisy interpersonal comparisons of well-being are possible. Formally, we suppose individual preferences are described by a von Neumann-Morgenstern (vNM) preference order on a space of lotteries over psychophysical states; the social planner must construct a vNM preference order on lotteries over social states. First, we consider a model where the individual vNM preference order is incomplete (so not all interpersonal comparisons are possible). Then, we consider a model where the individual vNM preference order is complete, but unknown to the planner, and thus modelled by a random variable. In both cases, we obtain characterizations of a utilitarian social welfare function.     

ALLOCATION OF GOODS BY LOTTERY

Many authors have argued that lotteries are used to allocate resources because of the fairness of the mechanism. However, a number of historical examples suggest otherwise. Participation fees are almost always charged and they are often discriminatory. In addition, goods (or bads) allocated by lotteries are usually not transferable. Both lottery participation fees and restrictions on transferability reduce rent-seeking from speculators. Each feature increases the rents to the primary user groups relative to the rents attainable from alternative mechanisms such as auctions, queues, or merit allocations.     

Lotteries in the state fiscal system

Lotteries give states direct revenue from the commercial gambling market. Thirty-two states plus the District of Columbia, encompassing almost three-quarters of the population, operate games, a dramatic spread since the first modern lottery in New Hampshire (1964). These lotteries typically make only a small contribution to state finances, yield revenue that is subject to dramatic annual changes, are expensive to administer, and place relatively greater burdens on low income than on high income individuals. Proceeds are often dedicated to particular functions, but whether lottery proceeds do more than simply substitute for funds that the function would otherwise receive is doubtful. The fiscal limitations of lotteries have not dimmed the public popularity of the games.     

Wer spielt Lotto?

On the basis of representative survey data, we examine the distribution effects state lotteries have on the social structure of Germany. Lotteries are highly taxed economic transactions whose proceeds make up a significant share of public fiscal revenues. Our analysis shows that lotteries are a form of regressive taxation. Further, taking the funding of amateur sports as an example, we show that earmarking lottery money increases the regressivity of this tax rather than reducing it. Using key demographic indicators such as levels of income, education, age and migration, we demonstrate the effects of fiscal redistribution. Based on these findings, we discuss implications of earmarking lottery revenues.     

DRAWN INTO VIOLENCE: EVIDENCE ON “WHAT MAKES A CRIMINAL” FROM THE VIETNAM DRAFT LOTTERIES

Draft lottery number assignment during the Vietnam Era provides a natural experiment to examine the effects of military service on crime. Using exact dates of birth for inmates in state and federal prisons in 1979, 1986, and 1991, we find that draft eligibility increases incarceration for violent crimes but decreases incarceration for nonviolent crimes among whites. This is particularly evident in 1979, where two‐sample instrumental variable estimates indicate that military service increases the probability of incarceration for a violent crime by 0.34 percentage points and decreases the probability of incarceration for a nonviolent crime by 0.30 percentage points. We conduct two falsification tests, one that applies each of the three binding lotteries to unaffected cohorts and another that considers the effects of lotteries that were not used to draft servicemen. (JEL K42, H56)