Economics of Gambling Research Paper

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Gambling refers to placing something of value at .risk on the outcome of an uncertain event. Often, it is money being put at risk (in a bet), and the event can be anything: a flip of a coin, a football game, a roll of the dice, a poker hand, a lottery, or a horse or greyhound race. Games of chance can be divided into skilled and unskilled, the distinction being dependent on the extent to which random chance determines the outcome of the wager. In coin tosses, slot machines, and lotteries, for example, the outcomes are based entirely on random luck; the behavior of the bettor has no impact on the outcome. Games of skill, on the other hand, are those where the decisions and actions of the bettor can impact the results. These types of games would include poker and blackjack, for example.

There are a number of interesting policy and economic issues surrounding different forms of gambling, and this research paper introduces many of these, with a focus on gambling in the United States. Since legal gambling is a relatively recent phenomenon, especially in the case of casino gambling outside Nevada, readers can find many other interesting questions that have yet to be addressed by economic researchers. One reason that gambling represents an interesting case study is that it is almost always subject to strict government regulation. Throughout much of the twentieth century, most forms of gambling were banned by most state governments. Gambling has often been seen by many as an unsavory or immoral activity. The reversing of these bans is a relatively recent phenomenon, and with most states having some form of legalized gambling, the so-called moral opposition to gambling has largely subsided. The result is an enormous expansion in legalized gambling industries in the United States. Indeed, as of 2008, approximately 38 states had lotteries, 40 had horse racing, 17 had greyhound racing, 12 had commercial casinos, and 29 had tribal casinos (American Gaming Association, 2008; Walker & Jackson, 2008). The growth of legalized gambling, led recently by casinos, has increased significantly worldwide. The economic downturn that began in 2007, however, has hit the gambling industry very hard.

The most interesting gambling sectors for economists are lotteries and casinos, although Internet gambling has seen a dramatic increase in popularity over recent years, and recent legal roadblocks have brought this type of gambling into the spotlight. Although pari-mutuels (e.g., greyhound racing and horse racing) have a longer history in the United States, these industries are not as large as the casino industry and contribute much less to state governments than lotteries or casinos do, so this research paper does not focus on pari-mutuel betting.

Like other service industries, the gambling sector can be expected to have a variety of impacts on local and regional economies. In the next section, this research paper discusses theoretical issues surrounding the economic effects of gambling, as well as the limited empirical evidence that is available. Next is a discussion of policy issues that can be informed by economic research and suggestions for future research topics. The focus of this research paper is on casinos primarily and lotteries secondarily; this is because they are the highest volume industries and have been the focus of most of the economic research in the gambling literature. Readers who are interested in smaller gambling sectors, such as greyhound racing, will find that many of the issues discussed in this research paper are directly applicable to those other sectors. Overall, the emphasis in this research paper is outlining what is currently understood among gambling researchers. Since this is still a relatively young area in economic research, with only a handful of individuals focusing on gambling, there is still very little empirical evidence on the economics of gambling.

What makes the gambling sector unique is that it must be specifically legalized by state governments. Unlike other everyday goods and services that anyone is free to produce and sell, state governments determine the types of gambling that can be offered, the sizes of the venues, who may offer them, and the taxes that will be levied.

Economic Impacts of Gambling

This research paper first addresses the benefits that are usually cited as reasons to adopt legal gambling. These effects include government revenues, which is the primary argument for lotteries and a major one for casinos; employment; consumer variety benefits; and complementary industry effects. Then this research paper discusses some of the potential negative impacts of legal gambling. These include regres-sivity of taxes, problem gambling, and a substitution effect with other industries. The discussion in this section includes an outline of theoretical issues, as well as a brief description of the available empirical evidence.

Benefits

Consumer Benefits

As with other industries, one of the major benefits of the gambling sector is that it results in increased mutually beneficial transactions. That is, since both the buyer and seller of the product, in this case a lottery ticket or a casino game, receive benefits from their transaction, generally there is an increase in the overall well-being in society. Such transactions are the source of economic growth, since both parties are enriched by them. One need not emphasize the benefits to the seller (i.e., the casino owner or the state government offering the lottery), because the profits earned by the industries are quite visible, and the fact that the sellers earn profits is not unique to the gambling industry.

Some people find it surprising that the consumers also benefit from gambling, even if they do not win. To understand this, it is necessary to discuss in more detail the nature of consumer transactions in a free market. Gambling is similar to other goods and services in that something of value is exchanged for money. For example, when someone purchases a $3 box of cereal from the gro-cery store, the grocery store prefers the $3 to the box of cereal—if the posted price is $3, then it means the store would rather have the $3 than the box of cereal. The cereal cost the store less than $3, and the difference is the store’s profit. On the consumer side of the transaction, the benefits are slightly more difficult to see. Generally, consumers’ willingness to pay must be at least as high as the market price for the consumer to be willing to buy the product. In the case of the cereal, the shopper will buy the cereal only if he or she believes the cereal will yield at least $3 worth of benefits. For a consumer who really enjoys this particular brand of cereal, the expected benefit might be $10. In this case, the consumer receives a profit of $7, which is the difference between the value of the cereal to the consumer, or his or her willingness to pay ($10) and the price ($3). As shown in this example, both the buyer and seller receive a profit from the transaction. In economics, the seller’s profit is referred to as producers surplus, while the benefit to the consumer is called consumers surplus.

Now turning to gambling as a service, one can see that transactions for gambling services are similar to that for the box of cereal. In the case of a lottery ticket, the price is $1. The state that sells the lottery ticket will, on average, return about 500 of each dollar to ticket buyers in the form of prizes and jackpots (Garrett, 2001). The remaining 500 is kept by the state to cover the costs of administering the lottery, with the remainder being kept as revenue for the state government to spend as it sees fit. (The costs section discusses lottery ticket revenues by the state in more detail.) The consumer pays $1 for the lottery ticket. The expected value of each ticket is around 500. That is, on average, the customer can expect to receive a 50% return on each dollar spent on the lottery. This is perhaps the worst bet of any legal form of gambling, in terms of the expected value. Aside from that, the odds against winning the jackpot are astronomical. Why, then, would anyone buy a lottery ticket? The reason is that the customers are not simply buying a return on their purchase prices. What are the benefits to lottery ticket buyers? Quite simply, enjoyment or entertainment. Many people find it entertaining and exciting to play the lottery. They enjoy the anticipation of seeing the winning numbers. They enjoy imagining what they would do if they won $200 million. Different people will value this experience differently.

Gambling at a casino is conceptually similar to the lottery. Almost all of the bets available in U.S. casinos have negative expected values. The casino makes its money by paying less than the true odds on winning bets. Typically the house edge is not that great, ranging from 1% to 15%, depending on the game. If a blackjack player bets and plays smart, the house edge is less than 5%. This means that for every $100 bet, the player should expect to lose less than $5. For slot machines, the house edge is higher, usually around 10%. As with lottery tickets, casino bets have negative expected value. The fact that millions of people go to casinos and play the games shows that they must receive some benefits from the experience. As with playing the lottery, casinos can be entertaining and fun. Gambling at a casino is also a more social experience than playing the lottery. The point here is many people enjoy the activity of gambling, and the benefits they receive from the activity (entertainment, excitement, etc.) apparently outweigh the price they pay (the house edge or the revenue from the lottery). This is similar to going to see a football game: Spectators expect to enjoy the experience enough to make it worth the price of the football ticket. Unfortunately, it is extremely difficult to estimate the amount of consumer benefits from gambling.

It might seem unnecessary to take such effort to explain why gambling might be beneficial for consumers. Surprisingly enough, the consumer benefit of legalized gambling is rarely cited as one of the benefits to support the legalization or expansion of gambling. Yet there is little doubt that consumer benefits are the largest benefit to be gained from having legal gambling (Walker, 2007b, p. 622). There is any number of reasons that may explain this common oversight. It may be that since politicians legalize gambling with their sights on government revenue, they are not so concerned with consumer benefits. It may also be due in part to the fact that a small percentage of consumers develop a gambling problem (i.e., addiction). The problems faced by these individuals may overshadow the benefits that accrue to the vast majority of gamblers who do not have a problem with the activity.

Empirical evidence on the consumer benefits from gambling is astonishingly rare. Several studies have been performed in a few countries, such as Australia (Australian Productivity Commission, 1999) and the United Kingdom (Crane, 2006), but no really comprehensive empirical studies have been performed in the United States to date. Some researchers have at least been attempting to keep the consumer benefits issue in the debate over gambling, but this benefit often gets lost in all the talk about tax benefits, employment, and the social costs of gambling.

Government Revenues

By far, the most obvious and commonly cited potential benefit from legalized gambling is revenue to the government. As discussed previously, the revenues from state lotteries can be substantial. Similarly, casinos can contribute a large amount of money to state government coffers. The government revenues from gambling are a strong argument for lotteries and casinos. However, the government revenue is one of the only arguments for the lottery. Casinos, as discussed in a subsequent section, may provide other economic benefits to a state that legalizes them.

Unfortunately, the issue of tax revenues it not as simple as it might first seem. Lottery revenues, for example, are often designated for supporting education. In states such as Georgia and South Carolina, lottery revenues are used to subsidize students’ tuition. This additional funding for education may encourage legislators to designate less for education discretionary spending. That is, lottery-supported education may crowd out other education spending. The net impact of the lottery on education spending need not be positive. In fact, through lottery advertising, the state may imply that overall education spending has increased with the lottery, even if it has not. This would occur if nonlottery education expenditures were cut in an amount greater than the lottery-financed education spending. Unlike lotteries, tax revenues from legal casinos are not commonly designated for causes such as education. Such revenues are used to fund the oversight organization and sometimes for help for problem gamblers, with much of the tax revenue going into states’ general funds.

Another interesting consideration for government revenues from legal gambling is that they represent voluntary taxes. That is, it is very easy for consumers to avoid paying these taxes; they can simply not buy lottery tickets or go to a casino. This argument is most commonly heard with the lottery, since nearly 50% of its sales represent tax revenues. One can argue that given government must raise revenue, consumers and taxpayers may prefer that the revenue be raised in ways in which it is easy to avoid paying the tax. Taxes on specific goods and services, like the lottery tax and taxes on casino gambling, fit this characteristic nicely.

As the states continue to face ever-worsening fiscal situations, they will continue to search for alternative ways of raising revenues. Raising more revenue using voluntary taxes is politically easier than cutting spending (benefits) or raising income taxes, property taxes, general sales taxes, or other unpopular taxes.

The total government revenues raised from gambling can be significant. As the American Gaming Association (AGA, 2008) reports, commercial casinos contribute a lot of money to the states, a total of $5.8 billion in the 12 states that had commercial casinos in 2007. Lotteries provide much more revenue. The North American Association of State and Provincial Lotteries (2009) reports that in fiscal year 2008, U.S. state lottery sales were about $60 billion, with net profits to the states around $18 billion. However, it is not clear that overall gambling revenue to the states more than offsets losses in other types of state revenues. The crowding-out issue has not been fully addressed by researchers. One recent empirical study on this topic suggests that gambling’s net contribution— considering casinos, lotteries, greyhound racing, and horse racing—to states’ budgets are relatively modest when they are positive (Walker & Jackson, in press). With respect to lotteries specifically, Thomas Garrett (2001) finds that state lotteries are designed to maximize the states’ revenues from the lottery.

Employment Effects

Another potential benefit of casinos is that they may have positive impacts on local labor markets. First, if a new business opens, it increases the demand for labor, which should push average wages higher. This benefits not only casino employees, but also other workers in the region surrounding the casino. Second, since a casino requires a major capital investment to build, the labor force required to build the facilities can be significant. Even once the building phase is completed, the casino will also need a significant workforce for its everyday operations. Often, a casino represents a major employer in its region. In this case, aside from simply putting upward pressure on wages and perhaps providing jobs for the currently unemployed, the opening of a casino could increase the total number of jobs available.

Casinos may divert consumer spending away from other options, just as any new business is likely to do. But compared with many other businesses, casinos are rather labor intensive. That is, they tend to have more workers than other types of business. Consider a movie theater, for example. Given an equal number of customers, a casino would require many more employees than a movie theater would to operate effectively. The implication here is that even if there is a substitution effect whereby casinos divert spending and employment from other industries, it is certainly possible—and perhaps likely—that the casino will have a net positive impact on wages and employment. Unfortunately, the extent to which this occurs has not been addressed in much depth by economists.

Legalized gambling can have a significant impact on employment, but such cases will be limited. For lotteries and Internet gambling, for example, there is little or no employment effect. Horse and greyhound racing may have a modest employment effect but will probably not have as significant an impact as the average casino.

There have been very few econometric studies of how gambling affects employment and labor markets. Most of what has been written comes from the casino industry itself, and it amounts to a listing of employment data. The AGA (2008) provides a wealth of data and shows that commercial casinos do, in fact, hire a large number of employees. But as critics have suggested that some of those jobs may come at the expense of jobs in other industries, so the net effect of casinos on employment is unclear. One study that has addressed the issue rigorously is by Chad Cotti (2008). This paper examines casinos nationwide at a county level. Cotti finds that counties that introduce casinos tend to find increased employment is a result, but there is no measurable effect on average earnings. This is one of the first published studies to empirically address the employment effects of casinos.

Complementary Industry Benefits

A final potential benefit from legalized gambling is the effects that the industry may have on complementary industries. As with employment, this issue is probably most relevant for casinos. The most successful casino model has proven to be the destination resort. Most casinos have an attached hotel, and patrons often stay, gamble, and dine in the same hotel-casino. Everything a vacationer needs is in one place. Despite the fact that often casinos can be resorts unto themselves, casinos can often do more business by agglomerating, or situating themselves near each other. This helps explain the great success of the Las Vegas strip. Many people go to Las Vegas instead of some other casino market because they know that there is a huge variety of casino resorts in Las Vegas. This variety provides important options for visitors.

Even though competition often represents a negative for a particular business, in some cases, nearby competition can be beneficial.

Aside from any agglomeration effects that may benefit nearby casinos, a particular casino may also have a positive impact on other, noncasino industries. In Detroit, for example, there are three commercial casinos downtown. Casinos that draw tourists or even locals can provide business for the casinos, but visitors may also decide to patronize other area businesses. These businesses then may benefit from the casinos’ existence. As discussed previously, the casino might have the opposite effect, substituting business away from other industries. Which effect is stronger is an empirical question that is going to vary by individual market conditions. As with other aspects of legalized gambling, there is scant empirical evidence on this issue. One recent paper to address this issue is by Cotti (2008). He finds that related industries see positive employment impacts and earnings spillovers from casinos. The other side of the coin (the substitution effect), however, has been studied more. Again, it is worth noting here that this issue applies mostly to casinos, less to racing, and not really at all to lotteries.

Costs

Substitution Effect

The previous discussion mentioned the possibility that casinos, in particular, may have complementary effects on neighboring businesses. On the other hand, casinos do act as a competitor to many types of business. In such cases, those industries will lose revenue and perhaps employment as the casino draws in customers. The state could in turn see a decrease in tax receipts. This substitution effect has been cited as a potential reason to avoid legalizing casinos, if the casino will cause more harm to other businesses than the benefits it creates. Consider an example in which casino revenues are taxed at the same rate that retail sales are taxed. Then, if casino spending were substituted dollar-for-dollar away from other industries, there would be no net tax effect from casinos. The same example could be applied to employment, so that the casino effect on employment would be neutral.

One might expect that as an entertainment industry, legalized gambling—whether the lottery, casinos, or horse racing—might impact different industries in different ways. This is fundamentally the case; in some cases, legalized gambling may act as a complement, and in others it is a substitute. It should be emphasized that the effects of a particular casino may be unique to that market. Simply because one sees a particular experience in one casino market does not mean that the same result would follow in another market.

Critics of casino gambling have long argued that gambling will not create new or better jobs because any jobs casinos create will be at the expense of other industries.

But it is not clear that this is the case. If employees actively seek casino jobs, it suggests that the casino job is the best opportunity available to them. However, if the casino causes other area businesses to close and those jobs disappear, then workers may have no option but to seek employment at the casino. Which case applies would depend on local economic conditions.

Regressive Tax

Vertical equity is one of the basic principles of tax theory. It says that individuals with higher income levels can generally afford to pay more in taxes and that they should be expected to pay more for fairness reasons. For this reason, many people expect the government to raise tax revenues disproportionately for higher income individuals. Such a tax is called progressive: The proportion of taxes paid to income rises as a person’s income level rises. However, if the proportion of tax paid to income rises as income falls, economists call this a regressive tax. Most people see such a tax as unfairly burdening the poor. (A tax for which the proportion of tax paid to income remains constant as income changes is called a neutral or flat tax.)

As an example, if a person with $10,000 income pays $1,000 in taxes, while a person earning $100,000 income pays $8,000, then this is a regressive tax: The poor person is paying 10% in taxes, while the rich person is paying only 8%. If the rich person were paying $10,000 in taxes, one would call this a flat tax, and if he or she were paying $12,000, for example, it would be a progressive tax. (Often regressive and progressive are terms applied to marginal tax rates, but this research paper is ignoring those for simplicity.)

Lotteries gained popularity with the states following New Hampshire’s legalization of them back in 1964. Lotteries in the various states have raised an enormous amount of revenue for state governments. However, questions have arisen over who bears the burden of these taxes. If poor people buy a disproportionate share of the lottery tickets, then they will bear a disproportionate share of the taxes raised by the state-sponsored lottery.

One of the main areas of debate over lotteries is whether the lottery represents a regressive tax. Evidence has shown that poor people do, in fact, spend a larger share of their incomes on lottery tickets than wealthier individuals do. The lottery is sometimes referred to as a tax on people who are poor or bad at math. The first part—the poor—is due to the fact that poor individuals spend a disproportionate amount of their incomes on the lottery than relatively rich people. The second part—bad at math—is referring to the fact that the lottery is by far one of the worst legal bets available anywhere. Casino games, pari-mutuel betting, and even poker all carry higher expected values, in general, than playing the lottery. Thus, the lottery may prey on those who are unaware of the odds against them—people who are bad at math. The general consensus is that lotteries do represent a regressive tax. This issue has not been studied for casinos or other forms of gambling, however. The issue has surfaced for casinos, but it has not been analyzed. The regressivity issue has not really been a concern among researchers with respect to other forms of gambling.

One could argue that if state governments or voters were concerned about placing a disproportionate tax burden on poor people, this effect could be offset if the revenue raised were spent on helping those individuals who paid the tax. However, in many states, the lottery revenue is earmarked for subsidizing college students’ educations. College students usually come from families with above average income. So even considering how the lottery revenue is spent, the lottery is generally believed to be regressive.

One issue to emphasize, however, is that the lottery tax is voluntary. That is, if poor people—or anyone else— would prefer not to pay the tax, they can simply not buy lottery tickets. According to this argument, then, the tax burden of lottery and casino taxes may not be a big concern. Of course, proponents of this argument might be sympathetic with the plight of the poor, and they might even believe that poor people would be better off if they spent their money on other goods and services, rather than on lottery tickets.

Problem Gambling

Consumer theory in economics suggests that individuals are generally best off when they are sovereign and have freedom to choose how to spend their money. The economics of consumer behavior is based on individuals attempting to maximize their utility or benefits from consumption, subject to some monetary budget that they can spend on goods and services. Given that consumers see decreasing marginal utility from consumption, then their optimal or utility-maximizing bundle of goods and services is that for which MUJPa = MUb/Pb =… = MUZ /Pz, for all the goods that they have the option of buying. Basically, this equation implies that consumers should spend each dollar on that good or service that will yield the most utility. Then when all the money is spent, they will have maximized utility. Theoretically, then, if the consumer has always chosen the best item to purchase, then the price-adjusted marginal utility for all items should be equal. Otherwise, the consumer could have purchased less of some goods (with relatively low MU/P) and more of others (with higher MU/P), resulting in a higher total utility. This behavior describes the typical consumer exhibiting rational behavior as it is taught in most intermediate microeconomics textbooks. In essence, the theory simply suggests that individuals make wise consumption choices based on prices and their estimates of potential benefits and costs from consumption. But perhaps gambling is different, or more precisely, perhaps some people behave differently when they gamble, compared with their behavior toward most other types of goods.

Psychologists, sociologists, and medical researchers have been studying gambling behavior, and over the past 20 years, the understanding of gambling problems has advanced greatly. Just as some individuals may develop addictions to alcohol or drugs, the same can happen with gambling. That is, some people may become so-called problem gamblers. (There is actually a wide range of different severity of gambling problems, but the discussion here will not distinguish among them.) This behavioral disorder is similar to alcoholism or drug addiction. It is characterized by gambling too much—to such an extent that careers, relationships, and families are significantly harmed by the behavior or its effects. It is fairly easy to imagine how a person spending all of his or her time and money gambling would cause other problems in life. The American Psychiatric Association (1994) has estimated that between 1% and 3% of individuals develop gambling problems to varying degrees. As a result, these individuals sometimes engage in socially costly behavior. Some will commit crimes to get money for gambling. Others will default on debts, be less productive, or skip work. Problem gambling has even been blamed for breakups of marriages, bankruptcy, and suicide.

Estimating the costs of such effects of problem gambling is difficult at best. A first step is estimating how many people are affected by their gambling problems. Then the researcher must somehow estimate dollar values for the various negative impacts from problem gambling. This dollar value is multiplied by the estimated number of problem gamblers in order to arrive at a social cost estimate. Empirical estimates of the social costs of gambling are fraught with methodological problems, and there is an ongoing debate among researchers over how to deal with these issues (Walker, 2007b). Because of this ongoing debate and the uncertainty surrounding the social costs of gambling, it would be irresponsible to suggest that a specific cost estimate is correct. On the other hand, it is very simple to point to errors in the various social cost estimates that have been published or publicized. The youngness of this area of research is evident from the fact that social cost estimates have ranged anywhere from $800 to over $13,000 per problem gambler per year. These estimates have been derived, in many cases, from a variety of arbitrary assumptions. As a result, such empirical estimates must be taken with a grain of salt. At a state or national level, of course, if 1% of the population exhibits problem gambling behaviors, then the social costs of gambling can be significant. Simply because at this time the empirical estimates are of poor quality does not mean that the costs, unmeasurable as they seem to be, are not important and significant.

Looking Forward: Policy Implications and Future Research

As is apparent from the discussion in the previous section, the research on the economic effects of gambling is still in the early stages of development. When empirical studies have been performed, their scope has usually been limited to small markets, to very short time periods, by unreliable data, or by some combination of these flaws. Therefore, it is very difficult to argue that there is some well-established empirical truth regarding how legalized gambling will affect a particular economy. At this time, the only thing one can say with certainty is that the economic effects of gambling will vary by location and region-specific characteristics. Obviously, much more research in this area is needed. Nevertheless, the political debates surrounding the economic effects of gambling have not waited on researchers to provide insight. Politicians and voters must deal with propositions to legalize or expand gambling or to change regulations. Often, the political debate is shaped by gambling proponents and opponents, with little support from economic research.

The policy implications with respect to lotteries are of limited importance at this time. Since most states already have some type of lottery, and for the most part, the states are extremely dependent on that money, there are few, if any, changes proposed in the status of lotteries. For example, it would be extremely surprising if any state that currently has a lottery were proposing to eliminate the lottery. Rarely will government simply cut off one of its revenue sources, especially during times of fiscal crisis. It is true, of course, that there is general agreement that the lottery represents a regressive tax. Even when the expenditures of the revenue are considered, the benefits of the lottery fall disproportionately on the relatively well-to-do, while the relatively poor pay a relatively large share of the burden. Although politicians and voters may be concerned with this type of redistribution of wealth, there is little chance that much will be done to change this.

Commercial casinos are a completely different story. During the past 20 years, these have been the source of intense debate in numerous states. As mentioned previously, 12 states currently have commercial casinos. Several others are actively working on legislation to allow them or have already had voted on casinos. For example, Kansas has approved casinos but is having trouble getting them started. Kentucky and Massachusetts have both already voted down casinos, but one can expect new proposals in the coming years until casinos are eventually approved.

Perhaps one should expect to see the most debate and the strongest push to adopt commercial casinos in those states that already have flourishing tribal casinos. This is because state governments receive limited revenues from tribal casinos. Since Native American nations are sovereign, their casinos are not governed by U.S. federal law or by state laws. However, tribes are required to sign compacts with their hosting states before tribal casinos can be offered. Often, such agreements include payments to the state for its agreeing to allow casino gambling. For example, the tribal casinos in Connecticut pay 25% of the slot machine revenue to the state’s government. But the state could potentially do even better for itself if it were to allow commercial casinos too. Other states that have tribal casinos are going to be tempted to introduce commercial casinos, which they would have the power to regulate and tax. This temptation is going to become even stronger as economic conditions around the country worsen. State governments are strapped for cash, and any opportunity to raise revenues will help politicians avoid even more difficult decisions.

Cost-Benefit Analysis

When states have considered the introduction of casinos, a debate surrounding cost-benefit analysis typically ensues. One of the most common tools employed by state governments in evaluating the likely effects of introducing casinos is a cost-benefit analysis (CBA). These studies may be performed to a variety of degrees of technicality, but they almost always include the same components. The benefits and costs typically cited are those discussed earlier in this research paper. The exception is consumer benefits, which are rarely mentioned in such studies, and which are often ignored by politicians. The important benefits cited are usually tax revenues and employment. The costs focus almost entirely on social costs attributable to problem gamblers. These may include theft, bankruptcy, and decreased productivity on the job, as previously discussed.

The primary goal in CBA is to produce a concise summary of how legal casinos will affect a state’s budget and economy. The simplicity of these studies—that their results can be summarized in one simple number, such as a net benefit of $10 million per year or a net cost of $10 million per year—makes them particularly attractive to politicians and even to voters. Policy makers may already know whether they wish to support casinos before seeing a CBA, but still the results of a CBA give them a piece of concrete data that they can cite to support their position. As discussed previously, however, in the context of social costs and consumer benefits, many of the costs and benefits associated with gambling are difficult, if not impossible, to measure. So even though politicians do rely on these types of studies to inform their decisions, they may be better advised not to, at least until this area of research improves significantly.

Other Considerations

Although the debate over legalized gambling is often couched in terms of expected costs and benefits such as tax revenues, employment, and economic development, there are arguably more important, fundamental considerations that have been largely ignored in the debate. Obviously, it is important that voters and policy makers be aware of the potential consequences of their actions. So a good understanding of the potential costs and benefits of legalized gambling is critical. The uncertainty of monetary estimates— that some of the costs and benefits are inherently unmeasurable—necessarily makes any cost-benefit analysis arbitrary to some extent. Even if this were not the case, the more basic issues of consumer sovereignty, and the role of government in a free society should be acknowledged and contemplated.

As mentioned previously, economists generally assume that consumers make rational consumption decisions, acting in ways that they see as improving their welfare. Whether it is gambling at a casino or buying lottery tickets or football tickets, consumers expect the benefits from their consumption choices to outweigh the costs. But with gambling, there is the potential that some consumers may become addicted. The same is true of other goods and services, and numerous goods and services can be harmful if consumed in excess. Generally, in a free country, consumers are given the right to make their own choices, even if they may harm themselves. This is an important right in a free society. Yet with gambling and many other consumer goods, people’s freedom is restricted. The extent to which consumer choice should be restricted is obviously debatable. But this fundamental issue receives little attention in the political debate over gambling.

Another important issue that should arguably be given additional consideration is the question of what the role of government in a free society should be. Should government restrict consumer choice for the good of consumers? Proponents of such a paternalistic role of government will point to drugs, alcohol, and other potentially dangerous goods as clear cases for which government regulation is necessary. On the other hand, staunch libertarians who view individual freedom as critically important will argue that there are many cases in which individuals may cause harm to themselves but that government cannot and should not attempt to protect everyone from their potentially bad decisions. The majority probably is more sympathetic with those who view regulation of gambling as justified. Still, a discussion of these issues should accompany policy debates. Unfortunately, gambling is seen by most as simply a tax issue.

Directions for Future Research

Despite the growth of gambling industries worldwide, there is still relatively little economic research being performed. Of the different sectors of the gambling industry, lotteries have by far received most of the research attention. The focus has been primarily on the regressivity of the lottery tax, as well as on how the revenues are spent. There appears to be a general consensus in the literature that on net, the lottery is a mechanism that transfers wealth from lower income groups to higher income groups. Despite this undesirable outcome, governments are unlikely to abandon lotteries, since they are seen as providing easy money for the cash-strapped states.

The research on pari-mutuels has focused on how greyhound racing and horse racing are affected and how they affect other industries. There has been particular interest in the United States in the effect of allowing slot machines at racetracks. Racetrack owners have argued that allowing slots at tracks, so-called racinos, help keep the tracks competitive with the growing number of casinos. Overall, the racing industry appears to be fairly stagnant. Still, some research is published on this industry regularly. But there are generally not many policy debates surrounding racing, other than whether to allow slots, so one should not expect much additional research on racing in the near future.

Internet poker has recently become the focus of significant attention since it was the target of recent legislation in the United States. Legal scholars can be expected to analyze what the effects of that law have been. As with lotteries, however, there are not many economic issues to debate with regard to Internet poker and online gambling. These appear to be mostly issues of consumer choice and regulation.

Casino gambling is by far the area in which most new research should be expected. Since casinos first spread in the United States beyond Nevada, data availability for testing the various economic effects of casino gambling has increased significantly. Among the issues that still need empirical research are the effects of casinos on state revenues, the effects of casinos on other gambling industries and other nongambling industries, the extent to which casinos in different states affect each others’ revenues, the extent to which gambling availability contributes to problem gambling, the social costs of gambling (defining, measuring, and creating monetary estimates), and many more. In fact, almost any conceivable issue surrounding the economic effects of casinos would represent a significant contribution to the literature.

A handful of researchers dedicate much of their research effort on legalized gambling. As such work gets published and as policy makers look for more reliable evidence to support their policy decisions with respect to legalized gambling, one should expect more researchers to look at this fascinating industry.

Conclusion

The economics of gambling is a wide-ranging subject, but most of the interesting issues under this topic are related to lotteries, horse and greyhound racing, and casinos. In terms of their revenues and contributions to state governments and the amount of academic and political debate they have inspired, casinos and lotteries are the most significant of the gambling sectors. This research paper focuses on those two industries, primarily.

Lotteries are important revenue sources for many states. Politicians like the lottery because it is a source of revenue, without which they might be forced to raise other taxes, cut spending, or some combination of both of those unpopular options. Despite the political attractiveness of lotteries, there has been some controversy in the economics literature over the extent to which lotteries raise their revenues at the expense of poor people. Empirical studies have confirmed that even considering how the states’ lottery revenues are spent (e.g., many states use the revenues to subsidize college students’ tuition), the lottery effectively transfers wealth from lower income to higher income individuals. Even considering this negative aspect of lotteries, there has been little push by voters or politicians to do away with lotteries. Of all the gambling sectors, economists’ understanding of the effects of this one is the greatest. The lottery has been subject to numerous studies. There have not been too many new issues that have required the attention of researchers.

Casinos are receiving growing attention from researchers, but there is much work to be done. Casinos are the subject of intense political and academic debate, since many constituents have a strong interest in the outcomes of the debates. Among the issues that have been examined with respect to casinos are how casinos affect other industries within particular states, the effects casinos have on state-level employment and wages, and the net change in state revenues resulting from the introduction of casinos. Yet there are many issues for which empirical evidence simply does not exist. Since casinos began to spread across the United States in 1989, economists now have much more data on casinos and their effects. This will make empirical analysis possible. It is to be hoped that more researchers will become interested in the industry.

The literature on the economics of gambling focuses mainly on economic development effects of introducing casinos, for example. These benefits must be viewed alongside the potential social costs that may also come with gambling. Each jurisdiction’s experience with legal gambling is likely different. Unfortunately, there has not been much empirical analysis of the economic effects of gambling. Even the relatively simple cost-benefit analyses that have been performed are potentially fraught with measurement errors. Gambling research is still young and is not very reliable yet. This suggests that researchers need to examine individual markets as well as more general relationships between gambling industries and other variables. There is much work to be done. The gambling industry is one that has been largely ignored by researchers. It is to be hoped that this is starting to change as the industry continues to grow.