The lottery as an alternative source of state revenue
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In this paper the authors have developed an economic model of state lotteries that determines the probability of whether a given state will adopt a lottery or not, determines the probability of whether a given state is likely to adopt a lottery sooner rather than later, and determines the state's expected net spendable revenues generated by adopting and operating a lottery. The authors found that a given state will tend to adopt a lottery and will tend to adopt the lottery sooner, the higher the relative tax effort of the state, the higher the mean personal income of the state's residents (or the lower the fraction of the state's residents that are in poverty), the greater the restrictions on raising other taxes in the state, the greater the state's spendable revenue generated from parimutuel betting in the state, the larger the fraction of the state's border that is contiguous with other states with lotteries, and since 1980, the greater the annual number of tourists or visitors in the state.
A state's expected net spendable revenue from adopting and operating a lottery is greater the higher the mean personal income of residents in the state, the greater the annual number of tourists or visitors in the state, the smaller the fraction of the state's border that is contiguous with other states with lotteries, and the smaller the parimutuel industry in the state. The ability of a given state's residents to cross the border to purchase lottery tickets in contiguous states, and the ability to engage in parimutuel betting in a state are substitutes for the purchase of lottery tickets in the given state and significantly reduce the expected net spendable revenue from adopting and operating a lottery in that state.
From a policy making standpoint, legislators often appear to support the adoption of a lottery for their state without fully considering a realistic expected level of net spendable revenue that the proposed lottery is likely to generate for that particular state.8 Often these legislators apparently do not consider important determinants of expected lottery profits such as the level of personal income of state residents, the annual number of tourists in the state, and the presence or absence of adjacent states with lotteries. Also, legislators do not consider fully the impact that adopting a lottery will have on existing parimutuel betting industries in the state. Likewise, legislators apparently do not consider the negative impact of parimutuel betting on the expected net spendable revenue generated by the proposed lottery. Legislative decisions made in the absence of full information often tend to be inefficient decisions. The present study may encourage policy makers to become better informed on the issue of lottery adoption for their state.
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