Make the Lottery Better for Dreamers and State Coffers

(Bloomberg) -- Here’s a story that tells us everything that’s wrong with the lottery: A woman stands accused of stealing over half a million dollars’ worth of lottery tickets from the Asheville, N.C., store that she managed … causing a loss to the North Carolina Education Lottery of a bit over $2,500. You read that right. According to law enforcement, the return on the allegedly stolen tickets was around one half of 1 percent on a dollar.

I’ve long been on the record as a critic of the state lotteries, for the usual reasons: First, the lotteries impose an implicit regressive tax on the poor (who spend a higher proportion of their income on them than the rich do). Second, the lotteries involve a government monopoly on a service that the private market, if allowed, would happily provide. But now I’m wondering whether I should soften my views.

According to news reports, the manager swiped the tickets over a period of about a year and a half to help pay medical expenses.  This might seem like a peculiar strategy, given the rationalities of the situation. She would have had to balance an exceedingly small possibility of winning a large amount of money versus the extremely high penalty for theft (discounted of course by the small possibility that she might escape detection). True, she seems to have been particularly unfortunate in that she won less than would have been expected. Even if she’d done better, repeatedly stealing lottery tickets is a very bad bet — worse, even, than repeatedly buying them. (And we all know what a bad bet that is.)

But do people really buy tickets expecting to win? Probably not. Hoping, maybe. Not expecting. As researchers have long recognized, lottery purchases are mostly consumption, not production. For a few dollars, we can spend a few days imagining what we would do with the money if we won. Playing the lottery has even been called a new approach to the American dream: People who are no longer confident that hard work and education will lead to advancement have come to believe that random chance just might.

Okay. So what has any of this to do with my rethinking of my opposition to lotteries? Just this: I fear I have given insufficient value to the libertarian value of autonomy. Absent significant social cost, I don’t think we should be in the position of telling people what they ought to enjoy. And that’s the point. For many buyers, the fun comes in the dreaming.

Suppose the North Carolina case involved no theft. Suppose we have instead a woman of modest means who over a year and a half spends $500,000 of her own money on lottery tickets. I might not agree with her priorities, but it would be wrong to prohibit her from acting on them. Yes, poor households spend a larger proportion of income on the lottery, a choice that forces cuts elsewhere. But if the poorer households were cutting expenses to spend the same amount on movies or vacations (or, for that matter, a New York Times subscription), we would honor their autonomy rather than calling them foolish.

Therefore, if we believe in autonomy, the case against the lottery as regressive must stem not from the fact that poor people spend significant resources on it but from the fact that the lottery exists principally for the purpose of filling state coffers.

Could the problem be solved by privatization? Yes, but only of the right kind. Although governments both in the U.S. and abroad have experimented with privatizing their lotteries, the experiments have been widely seen as unsuccessful, due to revenue shortfall. But that can’t be the right measure. As long as the purpose of privatization is to improve state revenues, the implicit regressive tax is preserved. The only difference is that the regressive tax is collected by private rather than public operators.

We need to think bigger.

Up until now, lottery privatization has essentially involved hiring private managers for the existing government monopoly.  What’s needed instead is competition: deregulation at both the state and federal level in order to open the lottery market to multiple providers. This would drive up the chances of winning as companies fight for customers. The market would quickly gravitate online, thus increasing the participation of younger consumers. The government would still get money, by taxing the private companies that provide lotteries.

Theorists who support this approach have long argued that the competitive pressure should raise the size of prizes. Critics have responded that a crowded market might make large prizes unprofitable. The Economist pointed out two decades ago why that’s not a likely outcome: “If dozens of lotteries were set up as a result of liberalisation, the weaker ones would not last long, especially if the absence of huge prizes caused a dip in sales. The most likely outcome would be just a handful of competing lotteries, probably backed by big firms with deep pockets, able to afford big prizes.”

Perhaps equally important, the multiple private providers might compete on game design, moving us away from the current model, in which states generally offer a choice between a gigantic prize that each ticket has a near-zero chance to win and different games with far smaller prizes and larger chances to win. Maybe somebody would roll out a game modeled on the Spanish Christmas Lottery with, say, 50 winners of $5 million each rather than one winner of $250 million.  The expected value of each ticket would be the same, but the sense of frustration at losing (to say nothing of the envy) is likely to be much smaller.

I don’t know what products the market would provide. I do know that we’d be on morally steadier ground with a competitive market for lotteries. Maybe state revenue would be less. I have no idea. But if that possibility is the reason to oppose privatization, then we must really like taxing the poor.

To contact the author of this story: Stephen L. Carter at scarter01@bloomberg.net.

  1. This return seems impossibly small. If the accusations are true, the manager probably stole scratch-off tickets, which in North Carolina have posted odds of in She should therefore have won over from the stolen tickets. Possibly she was caught before she was able to scratch and cash in all the winners.

  2. Apparently theft of lottery tickets in North Carolina is not exactly uncommon. This is the third reported incident in alone. For others, see here and here

  3. Buying tickets is heavily correlated with entertainment expenditures but not correlated with expenditures on basic needs.

  4. Often involving a very substantial upfront payment

  5. True, studies tell us that the larger jackpots draw more buyers, even if they have cross state lines to get tickets.

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