Abstract
This study explores the optimal payout structure and prize distribution of instant (scratch-off) lottery games. Using ticket sales data for 185 instant lottery games sold between 2007 and 2011 by the Maryland State Lottery and Gaming Control Agency, we calculate the price elasticity of demand across a range of ticket denominations. Our findings suggest that increasing the payout rate of instant tickets will increase revenue, particularly among low denomination tickets. We also find that reallocating the current prize distributions within a game towards fewer, but more valuable, low-tier prizes will increase the number of tickets sold.
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Notes
For example, Price and Novak (2000) found Texas lottery games to be a regressive form of taxation, with instant games being more regressive than other games. This finding is consistent with much of the prior literature on the topic (e.g. Clotfelter and Cook, 1987; Hansen, 1995). On the other hand, Garrett and Kolesnikova (2010) found that after controlling for cost of living differences, income elasticities are greater, suggesting that this regressivity is overstated and in some cases lotteries can be progressive.
For an extensive review of the current literature on the economics of lotteries, see Grote and Matheson (2011).
After the MLGCA determines that a game has sold more than 90 % of its run, they examine the remaining prizes available and determine whether or not to close a game based on the availability of any remaining top prizes. While a game may be removed due to lack of sales or popularity, this is rare, as the marginal cost of leaving the game open is low. While some states are required by law to pull games after all jackpots are won, the MLGCA is not required to do this for their instant games.
The elasticity estimates here indicate that an increase in payout of 1 % will translate into a 1.2 % increase in the number of tickets sold, so increasing payout rates by 5 % will increase sales by 6 %.
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Coon, M., Whieldon, G. Elasticity of Demand and Optimal Prize Distribution for Instant Lottery Games. Atl Econ J 44, 457–469 (2016). https://doi.org/10.1007/s11293-016-9512-8
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DOI: https://doi.org/10.1007/s11293-016-9512-8