The economics of lotteries.
The aim of this thesis is to consider the impact of lotteries on government revenue and
consumer expenditure patterns. The analysis of lotteries is of interest because they are
becoming increasingly popular as revenue raising instruments. They also provide a unique
insight into risk seeking behaviour, since the purchase of lottery tickets represents the
consumption of risk.
Five aspects of lotteries are considered in relation to the UK National Lottery. Firstly,
chapter 3 assesses the degree of substitution between risky gambles and riskless
intertemporal income substitution. The fiscal nature of lotteries is considered in chapter 4,
where we assess the role of lottery revenues in the tax system and model the effect of
changes in direct taxes on the revenue raising potential of the lottery. We show the lottery
is a normal good, and so lottery tax receipts are sensitive to changes in direct taxes.
Chapter 6 estimates the price elasticity of demand for tickets using time series data. Price
variation is identified through changes in the expected value of holding a ticket, which
varies with sales and the occurrence of rollovers. Pooled cross-section data is employed in
Chapter 7 to estimate the price elasticity of demand. Price variation is again identified
through changes in the price of a ticket arising due to the presence of rollovers. Here,
however, we also control for income effects, since individuals who participate in rollover
weeks may be different from those who participate in normal weeks. We also estimate the
income elasticity of demand, and the welfare benefit associated with the introduction of the
lottery. Previous studies have tended to concentrate on losses suffered by players, but we
show that utility maximising individuals must be substituting expenditure away from goods that yield lower utility, indicating an associated welfare gam from the lottery.
Finally, the topical issue of addiction is considered in chapter 8. We find evidence that the
lottery is addictive, though less addictive than smoking, and that rollovers are one possible
cause of this addiction