The Problems With Lottery Revenues

In the United States, most states run lotteries—a form of gambling where participants pay a small amount (usually $1) to select numbers that match those randomly spit out by machines. Winners take home cash prizes or other items. The lottery is a popular form of gambling, and state governments rely heavily on it for revenue.

But this arrangement has serious problems, as Clotfelter and Cook demonstrate in an excellent recent paper. Unlike other forms of legalized gambling, which rely on social norms to promote them, the lottery is a direct government subsidy. Lottery proceeds are earmarked for public good—usually education—and the idea is that state governments can expand their offerings without onerous tax increases or cuts in other programs.

This idea has been pervasive throughout history, with Roman emperors distributing property and slaves through lottery draws, and American colonists using them to raise money for schools, churches, roads and even cannons (as Benjamin Franklin did to build a battery of guns for Philadelphia’s defense).

The modern lottery is essentially a state-controlled monopoly that establishes itself by legislation; creates an agency or public corporation to run it; begins operations with a small number of relatively simple games; then—under pressure from the public and suppliers like convenience stores, which benefit from the huge advertising campaigns used to promote the lottery—produces innovations that significantly expand its size and complexity. The result is that revenues typically expand dramatically, then flatten out and even decline. This is called the “boredom factor,” and it drives a steady stream of new game introductions to keep revenues going.