Lotteries
Lotteries
Lotteries are most frequently government-sponsored alternatives to primarily illegal numbers games whereby the participants win cash prizes if they match a series of numbers or symbols. It can be argued that lotteries date back to biblical times (the process of “casting lots”) and there is considerable historical evidence of lotteries from the sixteenth century forward as a means by which municipalities raised funds for government finance. In the eighteenth and nineteenth centuries numerous lotteries raised very significant revenues to build roads, canals, courthouses, and so on, and in particular, to finance wars (Gribbin and Bean 2006). In the modern era of lotteries (presumed to have begun in 1964 with the initiation of the New Hampshire lottery in the United States), lotteries have generally not generated commensurately large revenues, but have served as an alternative revenue source that is politically expedient due to both participant and nonparticipant perceptions.
Lottery players generally cite the expected utility of a potential win as justification for playing, or at the least, the utility derived from thinking about what they would do with the money if they win. There is limited entertainment value in lottery instruments beyond these measures of expected utility, and no skill. Lottery players also recognize that even if they do not win, their money is designated for a generally desirable beneficiary group such as public schools, the elderly, or specific public works projects. Lottery commissions recognize the lack of entertainment value in their games and thus must constantly innovate to maintain player interest in participation.
Nonplayers appreciate that lotteries allow them to shift a portion of the municipal tax burden to those who do not understand or care about the long odds of winning. Their perception is the opposite of the advertising slogan, that is, “you cannot lose if you do not play.” Legislative leaders understand lotteries for what they have become: tax revenue sources that are not perceived as such, that allow the government representatives to take advantage of fungibility to shift funds to whichever projects or groups they choose, while maintaining the perception of effective earmarking for a desirable recipient group (Borg and Mason 1988).
From a procedural standpoint, lottery games fall into two basic categories: instant games and lotto games. Instant games are mostly scratch-off instruments whereby the player uses a coin or some other means to remove a coating from areas on a card, attempting to match a particular series of like symbols to win a predetermined amount. These games represent a relatively minor portion of the revenue raised by lotteries, but the area in lottery administration that requires the most innovation to maintain player interest. Lotto games are closer to the illegal numbers games mentioned above, requiring the winning player to match from three to six numbers, most frequently printed on ping-pong balls drawn from a container. The payouts in these games are substantial, ranging from hundreds to hundreds of millions of dollars. Most of these lotto games reflect odds that follow simple mathematical combinations, for example x C6 is a standard for many U.S. state games, where x is 49 numbers, 53 numbers, or some other magnitude. The 53C6 game implies that odds of winning are 1 in approximately 22 million. Longer odds are encountered in multistate games that also imply that the last ball drawn reflects a specific number (e.g., the “powerball”).
Lottery games are generally available in a large number of retail locations including grocery stores, convenience stores, and other establishments that are licensed by the municipality to distribute the tickets. Ticket sellers receive a commission for selling the tickets (frequently around 5% of sales) and many also share in the good fortune of winners with extra compensation. Evidence suggests that play increases when ticket availability is found close to either one’s home or workplace. Consequently, lottery ticket sales are frequently higher per capita in large cities as opposed to small towns and rural areas (Clotfelter and Cook 1989).
There are other significant demographic characteristics of lottery players that identify the implications of the tax inherent in lottery games. Consistently, researchers have discovered that lottery players tend to be older, and frequently members of racial and ethnic minority groups. Far more players come from large municipalities. There is significant crossover between states and countries whenever jackpots of the lotto games become large, and women tend to play lottery games slightly more than men. From an economic standpoint, the most significant demographic reality of lotteries is that while lottery play increases with income, it does so at a declining rate, suggesting that the routinely 50 percent tax rate inherent in lottery games is regressive (Clotfelter and Cook 1989, among many).
Among the other economic implications of lotteries, lotteries are inefficient from a tax standpoint. The responsiveness of demand for lotto games to price changes is often greater than one in absolute value, implying that taxes inherent in lottery games do not raise the same levels of revenue for the same cost as other tax sources. This reflects the luxury nature of lotto tickets in the player’s market basket. The magnitude of this effect is mitigated whenever a municipality increases the frequency of lotto games during the week, so current trends have reduced this effect somewhat (Mason, Steagall, and Fabritius 1997). Lottery tax revenues are generally relatively small compared to other tax sources, and are not as stable given that their magnitudes frequently depend on rollovers, and the impact that they have on player frenzy. Earmarking of lottery revenues to specific recipients is a bait-and-switch process that motivates players to justify their involvement while legislative bodies shift funds away from the designated recipient simultaneously. Numerous studies have shown that designated recipients of lottery revenues, for example, public education, are often worse off after the creation of a lottery (see, for example, Gribbin and Bean 2006). As more states adopt lotteries, the competition for lottery player dollars becomes more intense while the attractiveness of playing lottery games wane. This makes it likely that future lottery revenues generated by all states will diminish.
In summary, lotteries are a means by which legislative groups motivate individuals to provide tax revenue that they do not perceive as such in exchange for minute chances of winning cash awards. The economic consequences of these lotteries are just as condemning. Perhaps the best perspective on lotteries is that “your odds of winning are almost as good if you do not play.” The forty-one states in the United States and many municipalities around the world should learn this lesson to generate more stable and more conscientious government revenue generation.
SEE ALSO Expected Utility Theory
BIBLIOGRAPHY
Borg, Mary O., and Paul M. Mason. 1988. The Budgetary Incidence of a Lottery to Support Education. National Tax Journal 41: 75–85.
Clotfelter, Charles T., and Philip J. Cook. 1989. State Lotteries in America. Cambridge, MA: Harvard University Press.
Gribbins, Donald W., and Jonathan J. Bean. 2006. Adoption of State Lotteries in the United States, with a Closer Look at Illinois. Independent Review 10 (3): 351–365.
Mason, Paul M., Jeffrey W. Steagall, and Michael M. Fabritius. 1997. The Elasticity of Demand for Lotto Tickets and the Corresponding Welfare Effects. Public Finance Quarterly 25 (5): 474–490.
Paul M. Mason