The Political Economy of State-Owned Lotteries

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.