The Political Economy of State-Owned Lotteries

Abstract

An incomplete contracts approach is applied to analyse the lottery industry. It is argued that lottery services are more efficiently provided by private enterprises than by public enterprises, even if the addictive potential of lotteries is taken into account and government is assumed to be benevolent. However, in most countries, state-owned enterprises provide lottery services. In Germany, the 16 states each own a monopoly lottery-providing enterprise. This apparent puzzle is resolved by dropping the assumption that members of government are perfectly benevolent. The narrow self-interest of members of the state governments and other influential stakeholders in Germany helps to explain the persistence of the current structure of the lottery industry.

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Notes

  1. 1.

    Since contracting is a way for the government to regulate a contractor’s behaviour, I will use the terms regulation and contract interchangeably and in a broad sense, including both regulations issued by the government that potentially apply to more than one private actor and contracts between individual private actors and the government or individual government employees and the government.

  2. 2.

    Other possibilities, which I do not discuss here, are for the government to share ownership in a provider with private actors (Schmitz 2000) or to add a state-owned enterprise to the ecology of private enterprises.

  3. 3.

    See Richardt (2017) for a discussion both of the questionable paternalistic roots of aiming at the protection of players from themselves and the very minor fraction of players addicted to gambling in general and lotteries in particular.

  4. 4.

    I follow Hart et al. (1997) and Shleifer (1998) and assume that the government is perfectly benevolent, whereas public agents hired by government and private agents are assumed to only be imperfectly benevolent.

  5. 5.

    See section “The Political Economy of State-Provided Lotteries in Germany” for the German case. The lottery industry is obviously not the only industry in which services are on offer that are potentially addictive. Illegal drugs, tobacco, and alcohol come to mind as potentially addictive goods. In Germany, all of these are regulated in one way or another. But, in these cases, the government does not provide the goods through state-owned enterprises.

  6. 6.

    The regulation that accounts for security issues in the lottery industry does not have to be lottery specific. Regulations that require banks and nonbanks to protect their customers’ data could apply to lotteries too.

  7. 7.

    The addict’s harm here is short for negative externalities the addict imposes on his future self as well as on other members of society.

  8. 8.

    For the USA, Jones (2015) states that all revenue from lotteries was earmarked for education spending in 20 out of the 43 states that sponsored lotteries in 2014, while in some additional states, a fraction of the revenue was earmarked for education.

  9. 9.

    I gathered data on the revenue of the state-owned lottery enterprises from the states’ budgets, the annual reports of the lottery enterprises, and the Federal Gazette (Bundesanzeiger).

  10. 10.

    The original formulations of the goals can be found in the first paragraphs of the Staatsvertrag zum Lotteriewesen in Deutschland 2004, Glücksspielstaatsvertrag 2008, Glücksspielstaatsvertrag 2012, and Glücksspielstaatsvertrag 2017.

  11. 11.

    “Social lotteries” can be offered by nongovernmental organizations. They may not pursue any profits, and the residual that remains after the payout, taxes, and the costs of running the lottery has to be dedicated to philanthropic causes. Four such lotteries existed in 2016. Further, banks that do pursue profits may offer lotteries if at least 75% of the collected funds turn into savings for their customers. In 2016, the joint revenue of all nonstate lotteries amounted to less than 10% of the overall lottery revenue (Kleibrink and Köster 2017).

  12. 12.

    On the history of and differences between Lotto and class lotteries, see Willmann (1999).

  13. 13.

    I could not find any information on earmarking of funds from lottery enterprises in the state of Bavaria and the state of Mecklenburg-Western Pomerania.

  14. 14.

    I gathered information on the allocation of lottery-related revenues within the states’ budgets from the annual reports of the lottery enterprises, state budget reports, and further sources provided by either the states or the lottery enterprises.

  15. 15.

    From 1965 to 2013, lottery drawings were broadcasted on public television, first once a week on Saturdays and from 1982 onward also on Wednesdays (Beckert and Lutter 2008; Staatliche Toto-Lotto GmbH Baden-Württemberg 1998, 103). Since July 2013, live drawings of the lottery numbers have been broadcasted on the internet.

  16. 16.

    Sometimes patronage is regarded as a form of clientelism that relates to transactions in which public jobs or the benefits from public office are exchanged. Sometimes clientelism as a form to attain (electoral) support by using public resources is seen as distinct from patronage that denotes the use of public resources for the benefit of a particular organization—for instance, a party (Hicken 2011; Kopecky and Mair 2012).

  17. 17.

    Kopecky and Mair (2012) differentiate between these two motivations for acts of patronage.

  18. 18.

    2008: 15 000 euros; 2009: 20 000 euros; 2010: 23 000 euros; 2011: 23 000 euros; 2012: 21 500 euros; 2013: 15 000 euros; and 2015: 20 000 euros (Landesregierung NRW).

  19. 19.

    The provided information only reveals that a group of five sponsors provided sponsoring amounting to 18 500 euros.

  20. 20.

    As of April 2017, there are no such regional associations in Mecklenburg-West Pomerania, Saxony-Anhalt, and Brandenburg.

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Correspondence to Alexander Fink.

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I am indebted to Fabian Kurz for providing research support and the Institute for Research in Economic and Fiscal Issues for providing financial support.

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Fink, A. The Political Economy of State-Owned Lotteries. J Consum Policy 41, 257–272 (2018). https://doi.org/10.1007/s10603-018-9377-0

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Keywords

  • Lotteries
  • Lottery regulation
  • Private versus state ownership
  • State-owned enterprises
  • Lotteries in Germany