Gamblers’ Love for Variety and Substitution among Lotto Games

This paper considers the whether offering multiple lotto games within a state by joining a multi-state lottery increases total ticket sales compared to offering a single state game. The question is considered from two different perspectives, which both lead to the conclusion that states do tend to benefit from increased ticket sales overall by joining a multi-state lottery association. There is, however, a noted difference in the magnitude of that effect depending on the size of the average jackpots of the previously existing state games.lotto, lottery, public finance, gambling

In Search of a Fair Bet in the Lottery

Although state-operated lotto games have the worst average expected payoffs among common games of chance, because the jackpot can accumulate, the maximum expected payoff is potentially unlimited. It is possible, therefore, that lotto can exhibit a positive expected return. This paper examines 18,000 drawings in 34 American lotteries and finds approximately 1% of these drawings provided players with a fair bet. If it were possible for a bettor to purchase every possible combination, however, most lotteries commonly experience circumstances where such a purchase would provide a positive return with 11% of the drawings providing a fair bet to the player.lotto, lottery, public finance, gambling

The Economics of Lotteries: An Annotated Bibliography

This paper presents an annotated bibliography of all papers relating to the economics of lotteries as of early to mid 2011. All published scholarly papers that could be identified by the authors are included along with the published abstract where available.lotto, lottery, public finance, gambling

Dueling Jackpots: Are Competing Lotto Games Complements or Substitutes?

This paper considers the relationship that exists between two lottery products offered simultaneously in the same state, a smaller lottery game run by the individual state and a larger multi-state game run in coordination with other states. The primary issue is whether the two different products should be considered substitutes or complements for one another. The question is considered from two different perspectives that lead to a conclusion that while the two products do tend to be complements to one another, overall the individually run state lottery games experience a reduction in sales from the presence of the multi-state game.lotto, lottery, public finance, gambling

Examining the Halo Effect in Lotto Games

The "Halo Effect" occurs when lotto ticket sales are unexpectedly high following a large jackpot. An examination of the Powerball lottery finds evidence that the halo effect exists and that it is the result of bettors exchanging prize winnings for new tickets.lotto, lottery, public finance, gambling

The Economics of Lotteries: A Survey of the Literature

Lotteries represent an important source of government revenues in many states and countries, so they are of interest to public finance economists. In addition, lotteries provide researchers interested in microeconomic theory and consumer behavior with a type of experimental lab that allows economists to explore these topics. This paper surveys the existing literature on lotteries organized around these two central themes. The first section examines the microeconomic aspects of lotteries including consumer decision-making under uncertainty, price and income elasticities of demand for lottery tickets, cross-price elasticities of lottery ticket to each other and to other gambling products, consumer rationality and gambling, and the efficiency of lottery markets. The second section covers topics related to public finance and public choice including the revenue potential of lotteries, the tax efficiency and dead-weight loss of lottery games, the horizontal and vertical equity of lotteries, earmarking and the fungibility of lottery revenues, and individual state decisions to participate in participate in public lotteries.lotto, lottery, public finance, gambling

U.S. Lotto Markets

Lotteries as sources of public funding are of particular interest because they combine elements of both public finance and gambling in an often controversial mix. Proponents of lotteries point to the popularity of such games and justify their use because of the voluntary nature of participation rather than the reliance on compulsory taxation. Whether lotteries are efficient or not can have the usual concerns related to public finance and providing support for public spending, but there are also concerns about the efficiency of the market for the lottery products as well, especially if the voluntary participants are not behaving rationally. These concerns can be addressed through an examination of the U.S. experience with lotteries as sources of government revenues. State lotteries in the U.S. are compared to those in Europe to provide context on the use of such funding and the diversity of options available to public officials. While the efficiency of lotteries in raising funds for public programs can be addressed in a number of ways, one method is to consider whether the funds that are raised are supplementing other sources of funding or substituting for them. If lottery profits are “fungible” or substituting for other sources that would have been used in the absence of such profits, then the issues of equity and efficiency of lotteries relative to other sources are certainly heightened. The literature suggests that some degree of fungibility does exist, bringing these very concerns into question. Whether the lottery markets are efficient can be addressed, in part, by examining the rationality of its participants. This can be done by considering how consumers participate in the market, how they respond to changing prices (or effective prices in the case of lotteries), and whether the market ever provides its participants with a “fair bet,” a gamble in which there is a positive expected value from participating. While empirical studies provide somewhat mixed results, there are indications that consumers of lottery products are relatively rational and that lottery markets seldom provide “fair bets,” both indicators of efficient markets.lotto, lottery, public finance, gambling

Spreading the Fortune: The Distribution of Lottery Prizes across Countries

It has been 15 years since Cook and Clotfelter described the scale economies associated with state-run lotto games in an American Economic Review article entitled “The Peculiar Scale Economies of Lotto.” U.S. states with larger populations are identified as having the ability to offer games with larger jackpots to attract higher sales per capita. The current paper extends this analysis to all current U.S. state and multi-state lotto-style lottery games as well as to a sample of international lotto games for comparative purposes. The development of the two major U.S. multi-state games over time is also examined to illustrate that changes in the structure of those games can be explained by an application of the scale economies concept offered by Cook and Clotfelter.lotto, lottery, public finance, gambling

In Search of a Fair Bet in the Lottery

Although state-operated lotto games have the worst average expected payoffs among common games of chance, because the jackpot can accumulate, the maximum expected payoff is potentially unlimited. It is possible, therefore, that lotto can exhibit a positive expected return. This paper examines 18,000 drawings in 34 American lotteries and finds approximately 1 percent of these drawings provided players with a fair bet. If it were possible for a bettor to purchase every possible combination, however, most lotteries commonly experience circumstances where such a purchase would provide a positive return with 11 percent of the drawings providing a fair bet to the player.

U.S. Lotto Markets

Lotteries as sources of public funding are of particular interest because they combine elements of both public finance and gambling in an often controversial mix. Proponents of lotteries point to the popularity of such games and justify their use because of the voluntary nature of participation rather than the reliance on compulsory taxation. Whether lotteries are efficient or not can have the usual concerns related to public finance and providing support for public spending, but there are also concerns about the efficiency of the market for the lottery products as well, especially if the voluntary participants are not behaving rationally. These concerns can be addressed through an examination of the U.S. experience with lotteries as sources of government revenues. State lotteries in the U.S. are compared to those in Europe to provide context on the use of such funding and the diversity of options available to public officials. While the efficiency of lotteries in raising funds for public programs can be addressed in a number of ways, one method is to consider whether the funds that are raised are supplementing other sources of funding or substituting for them. If lottery profits are “fungible” or substituting for other sources that would have been used in the absence of such profits, then the issues of equity and efficiency of lotteries relative to other sources are certainly heightened. The literature suggests that some degree of fungibility does exist, bringing these very concerns into question. Whether the lottery markets are efficient can be addressed, in part, by examining the rationality of its participants. This can be done by considering how consumers participate in the market, how they respond to changing prices (or effective prices in the case of lotteries), and whether the market ever provides its participants with a “fair bet,” a gamble in which there is a positive expected value from participating. While empirical studies provide somewhat mixed results, there are indications that consumers of lottery products are relatively rational and that lottery markets seldom provide “fair bets,” both indicators of efficient markets