An International Comparison and Analysis of Lotteries and the Distribution of Lottery Expenditures

Lotteries are found in nearly half of the world's countries, with annual worldwide lottery ticket sales topping $115 billion. Despite the global presence of lottery games, there has been little research conducted on any international aspect of lotteries. This paper presents the first-ever examination and comparison of lottery games from around the world. Differences in both absolute and relative lottery expenditures are presented. Estimates for the income elasticity of demand for lottery tickets provide evidence on the distributional burden of lottery expenditures. These estimates consider each country by continental location and country income level. Further analysis reveals that lower income countries could adopt Lotto games in order to increase revenues. Recognizing that the distributional impact of lottery games is one of the greatest concerns surrounding lotteries, it is shown that the introduction of Lotto games does not significantly affect the distributional burden of lottery ticket expenditures. Given the international scope of lotteries and the availability of international lottery game data, the paper concludes by discussing future research on international lottery games.     

Charitable Lottery Structure and Fund Raising: Theory and Evidence

Do fixed-prize charitable lotteries generate more net revenue than do revenue-dependent lotteries? I present the results of an experiment designed to test a theoretical prediction of the relationship between the prize structure of a lottery funding a public good and individuals' participation in the lottery. I find that a fixed-prize lottery configuration induces significantly greater participation and a significantly higher level of public good funding than does a revenue-dependent lottery.     

Tax incentives in fiscal federalism: an integrated perspective

Abstract Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue‐sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis ( Brennan and Buchanan 1980 ). Finally, we characterize the efficient design of intergovernmental fiscal ties.     

When less is more: Rationing and rent dissipation in stochastic contests

This paper shows how to maximize revenue when a contest is noisy. We consider a case where two or more contestants bid for a prize in a stochastic contest where all bidders value the prize equally. We show that, whenever a Tullock contest yields under-dissipation, the auctioneer?s revenue can be increased by optimally fixing the number of tickets. In particular, in a stochastic contest with proportional probabilities, it is possible to obtain (almost) full rent dissipation. We test this hypothesis with a laboratory experiment. The results indicate that, as predicted, revenue is significantly higher in a lottery with rationing than in a standard lottery. On the other hand, an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery.     

Reducing ambiguity in lotteries: evidence from a field experiment

Ambiguity about the chances of winning represents a key aspect in lotteries. By means of a controlled field experiment, we exogenously vary the degree of ambiguity about the winning chances of lotteries organized to incentivize the contribution for a public good. In one treatment, people have been simply informed about the maximum number of potential participants (i.e. the number of lottery tickets released). In a second treatment, this information has been omitted as in all traditional lotteries. Our general finding shows that simply reducing the degree of ambiguity of the lottery leads to a sizable and significant increase (67%) in the participation rate. This result is robust to alternative prize configurations.     

THE EFFECT OF CASINO PROXIMITY ON LOTTERY SALES: EVIDENCE FROM MARYLAND

The continued expansion of the casino industry has caused increasing concern regarding the cannibalization of other industries, and in particular, state lotteries. For example, Maryland Lottery sales flattened shortly after casinos began opening in the state. Although previous papers have found that casinos and lotteries have a negative relationship with each other, no previous research has analyzed the impact of casino proximity on lottery sales or has examined the relationship between casinos and different types of lottery games. In this paper, we examine ZIP code‐level monthly lottery sales data from Maryland between July 2009 and February 2014, in order to test the impact of casino proximity on lottery sales, by type of game. Our findings indicate that aggregate lottery sales decline more in closer proximity to casinos, but that casinos affect different lottery products differently. We discuss the consumer behavior and public finance implications of the findings. (JEL H27, H4, L83)     

Poverty and probability: aspiration and aversion to compound lotteries in El Salvador and India

Some experimental participants are averse to compound lotteries: they prefer simple lotteries that depend on only one random event, even when the simple lotteries offer lower expected value. This paper proposes that many behavioral “investments” represent more compound risk for poorer people—who often face multiple dimensions of deprivation—than for richer people. As a result, identical aversion to compound lotteries can prevent investment among poorer people, but have no effect on richer people. The paper reports five studies: two initial studies that document that aversion to compound lotteries operates as an economic preference, two “laboratory experiments in the field” in El Salvador, and one Internet survey experiment in India. Poorer Salvadoran women who choose a compound lottery are 27 percentage points more likely to have found formal employment than those who chose a simple lottery, but lottery choice is unrelated to employment for richer women. Poorer students at the national Salvadoran university choose more compound lotteries than richer students, on average, implying that aversion to compound lotteries screened out poorer aspirants but not richer ones. Poorer and lower-caste Indian participants who choose compound lotteries are more likely than those who choose simple lotteries to have a different occupation than their parents, which is not the case for better-off participants. These findings suggest that the consequences of aversion to compound lotteries are different in the context of poverty and disadvantage.     

Expenditure taxes,income taxes,and time-inconsistency

Traditional welfare-based comparisons of different tax structures implicitly assume that the government can precommit to its future optimal policy. When optimal tax rates are time- inconsistent, however, such comparisons may be misleading. This paper uses a two-period representative-consumer optimal taxation model to study the implications of time-consistency for the welfare rankings of expenditure and income taxation. I show that the welfare rankings of optimal policies may not be preserved by time-consistent ones.     

Decentralizing lottery allocations in markets with indivisible commodities

Summary In economies with indivisible commodities, consumers tend to prefer lotteries in commodities. A potential mechanism for satisying these preferences is unrestricted purchasing and selling of lotteries in decentralized markets, as suggested in Prescott and Townsend [Int. Econ. Rev.25, 1–20]. However, this paper shows in several examples that such lottery equilibria do not always exist for economies with finitely many consumers. Other conditions are needed. In the examples, equilibrium and the associated welfare gains are realized if consumptions are bounded or if lotteries are based upon a common sunspot device as defined by Shell [mimeo, 1977] and Cass and Shell [J. Pol. Econ.91, 193–227]. The paper shows that any lottery equilibrium is either a Walrasian equilibrium or a sunspot equilibrium, but there are Walrasian and sunspot equilibria that are not lottery equilibria.This paper is based on Chapter 3 of my doctoral dissertation, written while I was a student at Cornell University. I thank Larry Blume, Yue Yun Chen, David Easley, Aditya Goenka, John Marshall, Bruce Smith, John Wooders and an anonymous referee. I am particularly grateful to Karl Shell and Cheng-Zhong Qin. I thank the Academic Senate at UCSB for financial support.     

Modelling demand for lotto using a novel method of correcting for endogeneity

Modelling lottery sales as a function of the mean, standard deviation and skewness of the probability distribution of returns potentially gives insights into how the design of a game could be modified to maximise net revenue. But use of OLS is problematic because the level of sales itself affects values of the moments (and insufficient instruments are available for IV regression). We draw on the concept of a rational expectations equilibrium, developing a new regression model which corrects for endogeneity where the causal impact of the dependent variable on the right-hand side variables is deterministic. We apply the model to data on lotto sales from Spain. Using the Spanish data, we show that results provide more reliable guidance to lottery agencies because accounting for endogeneity leads to significantly different results from OLS and these results have superior performance in out-of-sample forecasting of sales. More generally, results prove consistent with the Friedman-Savage explanation of why people buy lottery tickets and with evidence from racetrack data that ‘bettors love skewness’.     

Principles and Practice of Resource Rent Taxation

The Henry Review placed the taxation of rents from mines back on the national policy agenda. Mineral rent is potentially a source of neutral taxation. However, the various means of taxing resource rents in practice either fall short of the ideal of neutrality or collect for the revenue only a small proportion of the mineral rent. This article discusses the six principle instruments for taxing resource projects. It evaluates these forms of taxation in relation to stability, neutrality and government revenue maximisation. It suggests a combination of instruments that is likely to establish a good balance among objectives.     

Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries

We revisit the classical result that taxation of private consumption is distortionary and therefore precludes the efficient provision of public goods. We introduce a nonlinear consumption tax which we call a ‘tax lottery’. Under this scheme, an ad-valorem consumption tax is supplemented with a lottery in which consumers can win cash prizes. The winning probabilities in this lottery depend on all consumers' private good consumption decisions. We show that for a given ad-valorem tax, an appropriately designed lottery can implement an efficient allocation in pure-strategy Nash equilibrium. The lottery component corrects the distortion in private consumption due to the ad-valorem tax, while the resulting tax revenue is sufficient to efficiently provide the public good and pay out the lottery prize.     

Carbon-reducing taxes and income inequality: general equilibrium evaluation of alternative energy taxation in Taiwan

Recently, several studies have been a detailed evaluation of the economic implications of energy taxation as a policy instrument to conserve energy and reduce carbon emissions. However, little attention has been devoted to inquiring about the economic implications of energy taxation in the newly industrialized countries (the so-called NICs). In this paper, we use a multisector, multihousehold computable general equilibrium model to assess the distributional effects of alternative energy taxation on the Taiwan economy. The counterfactual simulation technique is applied to investigate the income distribution implications of: (1) an increase in the import taxes of crude oil; and (2) an increase in the excise taxes of petroleum products. Our empirical results basing on Taiwan's data show that both energy taxes increase government revenue and the Gini coefficient, but reduce net value-added, private consumption, disposable income and equivalent variation. A raise in the Gini coefficient implies that there is a worsening in the distribution of income. The lowest income group suffers relatively large welfare and income loss, but the highest income group suffers a relatively small welfare and income loss. The distributional effects differ from household to household depending on the composition of their total consumption and the source of their factor income. Our findings reveal that the energy tax appears to be mildly regressive, there are broadly consistent with those cases of developed countries reported in previous studies.     

Network externalities in consumer spending on lottery games: evidence from Spain

We use data from two nationally representative Spanish surveys in 2005 and 2006 to investigate spending on lottery games. Estimates from Tobit and double hurdle models of participation in lottery markets and spending on lottery tickets find that frequent participation in one game is not associated with an increased or decreased probability of participating in other games, but is associated with increased spending on other games. Consumer spending on different lottery games exhibits inter-related consumption decisions. Also, the assumptions underlying the double hurdle model, but not the Tobit model, better describe consumer spending on lottery tickets in Spain.     

Economic shocks and lottery sales: an examination of Maine State lottery sales

ABSTRACT

Most U.S. states earn significant amount of revenues from lottery sales. However, they are also criticized for promoting the lotteries because they have been seen as taking advantage of poor populations. The purpose of this study is to identify the impact of various economic factors on lottery sales by using zip-code level sales within the state of Maine. The results show that an increase of 1% in unemployment rate results in a 0.38% increase in draw lottery sales, but it has no significant impact on instant lottery sales. This highlights the importance of differentiating between two major types of lotteries.     

Taxation of firms with unknown mobility

We analyze optimal business tax policy when some firms are able to escape taxation by moving abroad. In contrast to the existing literature, we assume that the true number of mobile firms is ex ante unknown. While the government may learn from the firms' location responses to past tax rate changes, firms may anticipate this and adjust their choices accordingly. We find that incomplete information on mobility substantially affects the properties and the implications of equilibrium policy choices. First, the government may find it optimal to set a tax rate that triggers partial firm migration but full revelation of the true number of mobile firms. Second, we show that, if the firms' outside option is attractive (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. Third, there is a positive value of learning, i.e., commitment on future tax rates cannot increase the government's expected revenue. However, if the government can commit to a rule‐based learning mechanism, i.e., credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.     

Tax-mix, public spending composition and growth

This paper characterizes optimal fiscal policy in an endogenous growth model whose policy implications are consistent with the relationship between two stylized facts observed in a majority of OECD economies, namely the growth in the ratios of both government consumption to public investment and of direct to indirect taxation from 1970 to 2004. Assuming a continuation in the upward trend for the public consumption to output ratio consistent with that observed for this variable between 1970 and 2004 for most developed economies, we find that the optimal tax system becomes more intensive in income taxation relative to consumption taxation, and that public disbursements become less intensive in public investment, which is consistent with the co-evolution of these ratios over the last 40 years.     

On the Evaluation of Options on Lotteries: An Experimental Study

We present the results of a comparative experimental study of the evaluation of simple lotteries and call/put/insurance options on these lotteries. The main findings and conclusions are:

(a) The observed bidding patterns depend on the type of asset under evaluation. In particular, subject behavior when buying or selling a basic lottery seems much more cautious than their behavior when buying or selling options on that lottery.

(b) The observed bidding patterns also depend on subject positions with respect to the underlying asset. In particular, the bids for buying lotteries and options long are statistically uncorrelated with the bids for selling the same lotteries and options short.

(c) Subjects with extreme risk attitudes are more inclined to violate basic no-arbitrage conditions (like the call-put parity) when bidding for the different lotteries.

We demonstrate that it is difficult to reconcile the experimental evidence with mainstream theories on individual decision and choice (although we find strong support for prospect theory in some parts of the data). We conclude that the evaluation of options on lotteries is context-dependent and subtler than perceived by existing theories.     

A Synthesis of Contour and Flexible Wage Hypotheses

Economic instability has risen in emerging economies after capital account liberalization. A more progressive income tax policy could offer a stabilizing alternative. It could result in more revenue, more countercyclical policy, and more income equality and thus more stable demand growth. We test the effects of progressive taxes on stability using univariate and multivariate analyses based on panel data for emerging economies from 1982 to 2002 and compare those to the effects of a value added tax (VAT). We also consider possible constraints on tax policy design, such as government spending, international tax competition, and openness. Progressive taxes are associated with greater income equality and a higher likelihood of countercyclical fiscal policies. The potential benefits from progressive income taxation, though, are lower with VAT. Tax policy is also constrained by government expenditures and openness, but not by lower corporate taxes, suggesting that all income tax rates are constrained by openness.     

The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, even in the presence of differences in regional tax capacity, tastes for public spending, and population. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.