Transcript The Economics of Casino Gambling
Douglas M. Walker, Ph.D.
Associate Professor of Economics College of Charleston Macao Polytechnic Institute Global Gaming Management Seminar Series October 23, 2009
◦ ◦ ◦ ◦ Psychology, sociology, and medical Diagnosis and prevalence estimation of ‘pathological gambling’ Treatment Economic Cost-benefit analysis Economic impacts (employment, tax revenues, etc.) Social costs of pathological gambling Inter-industry effects Tax effects 2
Lotteries ◦ Research focus on decision to adopt, effects of expenditures (earmarking), net government revenue Pari-mutuels ◦ Least studied; smallest industry ◦ Research on the inter-industry relationships Casinos ◦ Some research on decision to adopt, economic effects, inter-industry effects Others ◦ Inter-track wagering; ‘racinos’ ◦ Online poker/gambling 3
◦ This paper summarizes my research on the issues listed below.
It is non-technical, for a general audience [1] Determinants of casino adoption [2] Casino gambling and economic growth [3] Relationships among gambling industries and effects on tax revenues [4] The social costs of gambling [5] Measurement problems in cost-benefit analysis 4
Our paper follows the lottery adoption literature ◦ Seeks to explain why some states adopt lotteries ◦ Calcagno, Walker, and Jackson (2010) provides a comprehensive analysis ◦ Explanatory variables include state fiscal, political party, and demographic, as well as existing gambling opportunities in nearby states ◦ Only one paper previously examined casinos (Furlong 1998) Findings suggest that ‘fiscal stress’ and ‘defensive legalization’ are primary motivations Model has obvious applicability to a local or international analysis This question is not as interesting as the effects of gambling 5
◦ ◦ Commercial casinos in the U.S. appeared outside Nevada and New Jersey beginning about 1989.
Very few economic studies of the casino industry prior to this Beginning in the early-mid 1990s, some anti-casino advocates began publishing articles Yet, there was no empirical evidence in the U.S.
Examples: Goodman, Grinols, Kindt 6
◦ State governments look to casinos for tax revenue and economic development.
◦ ◦ ◦ Now 12 states have commercial casinos Still few studies on casinos’ economic effects Many states are currently considering casinos.
Walker and Jackson (1998) was an early analysis of economic effects of casinos in the U.S.
A follow-up study was published in 2007 7
◦ ◦ The study was performed in 1997, using quarterly data from 1991-96 Panel with 232 observations Granger causality 3-step model applied to panel data (i) Filter trend and state-specific trends from data (ii) Select appropriate time series process that generates each variable (iii) Conduct Granger causality test 8
◦ ◦ ◦ ◦ ‘Granger causality’ basically means that adding a past values of another variable helps to predict a particular variable.
Four possible findings: Per capita income ‘causes’ Casino revenue Casino revenue ‘causes’ Per capita income Feed-back (both variables ‘cause’ each other) No relationship Results indicate that causes
casino revenue per capita income
Granger No causality detected in the other direction 9
We recently repeated the analysis (Walker and Jackson 2007) ◦ Using annual data from 1991-2005 ◦ Results indicated no Granger causal relationship Could be the result of using annual rather than quarterly data Results go against our earlier findings 10
◦ ◦ ◦ ◦ ◦ Perhaps there is an initial short-run stimulus effect from casinos Increased demand for capital and labor Higher wages and payment to capital Eventually this effect dies out Casinos are integrated into local economy Competition from other industries, neighboring state opportunities, online, etc.
Perhaps casinos cannibalize other industries 11
Politicians and the casino industry argue a number of potential benefits from casinos ◦ employment ◦ higher wages ◦ consumer benefits (probably key benefit, but not a key argument) Perhaps the most convincing
political
argument is tax revenues / license fees 12
Whether casinos provide such benefits depends, in part, on gambling industry inter-relationships This issue has not received much attention ◦ Studies on two industries, one-way relationship ◦ Limited studies: one state, one county, short time period ◦ Results indicate industries harm each other Are there
general
relationships?
inter-industry 13
Walker and Jackson (2008b) analyze the relationships for all U.S. states, 1985-2000 ◦ Model industry volume ◦ casino gambling greyhound racing horse racing lottery tribal casino square footage An equation for each of the four industries, with explanatory variables including other industry volume adjacent state volume demographic variables 14
Results are…mixed ◦ ◦ ◦ ◦ Substitutes: lottery/casino, horse/dog, Complements: horse/casino, lottery/dog, horse/lottery Relationships among industries could be different in particular states Our study is a national panel study, but analysis of a single state could certainly yield different results Other countries may find different results too 15
◦ ◦ ◦ ◦ ◦ Relationships among gambling industries obviously will affect overall tax revenues Few studies on this exist in the U.S.
But some studies on lotteries… The tax effect of adding a particular industry will depend on several factors Tax rates Relationships with other gambling industries Relationships with non-gambling industries 16
◦ ◦ ◦ ◦ Walker and Jackson (2010) model total revenue by state governments Use 1985-2000 data Dependent variable: state government revenues (net of federal transfers) Two variables measure gambling in the states industry dummy variables to measure ‘existence’ of the industry in the state Marginal impact variables measure volume of gambling in each industry Various other explanatory variables 17
◦ ◦ Results are mixed, suggesting it is not straightforward for the ‘average’ state Lottery and horse racing ⇨ positive impact on state revenue Lottery has relatively high ‘tax’ rate and low costs Horse racing often has related economic development Casinos and greyhound racing ⇨ negative impact Casinos appear to have a large ‘substitution’ effect even though they have a high tax rate Greyhound results are questionable (extremely large) It is unlikely that these results would apply, for example, in Nevada 18
◦ ◦ ◦ Overall, our work on inter-industry relationships and tax effects indicate… The effects of casino gambling on the state economy are not straightforward.
There are complicated inter-industry relationships.
More state-level studies may be useful as data availability improves.
An important extension would be in which cases do casinos have a positive tax effect?
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Arguably the most important area of research to which economists can contribute Researchers with variety of academic backgrounds attempt ‘economic’ analyses Any ‘harm’ that can remotely be connected to gambling is, and such harms are estimated and called ‘social costs.’ 20
Costs are typically the focus by media, politicians, and researchers.
◦ This may be a result of the once-typical illegal status of casinos: ◦ ‘Are the benefits of legalization/expansion worth the costs?’ Estimating benefits is relatively easy.
Defining and estimating costs is relatively difficult.
Costs are closely related to prevalence of pathological gambling.
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Most of cost studies use this formula:
est. annual cost per pathological gambler X prevalence est. (%) X population est. = est. annual social cost of gambling 22
Authors rarely define ‘social cost’ before estimating it.
Studies use
ad hoc
methodologies, resulting in cost estimates ranging from US$9,000 50,000 per pathological gambler per year.
Such a large range indicates that the methodologies are not the same.
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◦ Walker and Barnett (1999) were critical of published cost estimates Argue that social cost is an decrease in aggregate societal wealth Excludes transfers of wealth Excludes internalized costs These exclusions make other social scientists uncomfortable 24
Goodman (1994, 1995) Grinols (2004) Grinols and Mustard (2006) Politzer et al. (1985) Thompson et al. (1996, 1997, 1999) Thompson and Quinn (2000) Thompson and Schwer (2005) I have some examples of specific estimates, if anyone wants to see details on this… 25
◦ ◦ This issue has received more technical analysis, particularly by Grinols and Mustard (2006) They find that casinos cause crime, after a time lag.
They argue that the costs associated with casino crime is significant.
There are several problems with their analysis which probably invalidate their results 26
◦ ◦ ◦ The crime rate is C/P in a closed economy If we consider a jurisdiction that has a lot of visitors (tourists), then it is appropriate to include… Crimes committed by visitors Visitors in the population at risk The appropriate crime rate for representing the risk of being victimized: (C R +C V ) / (P R +P V ) But Grinols and Mustard use: (C R +C V ) / P R There are other problems too… (See Walker 2008) 27
Even if we have an valid definition of ‘social cost’ and agree on the components, there are serious measurement problems… {a} Counterfactual scenario {b} Comorbidity {c} Survey data and fungible budgets {d} Government expenditures If a particular study does not address these, it should probably be ignored.
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◦ For policy purposes, the economic and social effects of legalized casinos must be compared to the case in which casinos are not legal.
Difficult to know… Unless the counterfactual is what is already happening.
In some stagnant economies, one could argue that no other industry would have come (e.g., Mississippi Gulf Coast) 29
In terms of problem/pathological gambling… ◦ If casinos were not legal in the state, would people just go to other venues?
◦ If casinos were not available, would the pathological gamblers with coexisting disorders have more serious alcohol or drug problems?
If yes, then it is possible that the gambling legalization would lead to lower social costs even if more people would become pathological gamblers.
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◦ ◦ ◦ Problem gamblers have other disorders.
◦ This may be the biggest problem in cost-benefit analysis. Petry, Stinson, and Grant (2005, p. 569) find: ◦ 74.2% have alcohol use disorders 38.1% have drug use disorders 41.3% have anxiety disorders 28.5% have obsessive-compulsive personality disorder How to allocate “social costs” to gambling when most pathological gamblers have multiple disorders?
Most of the published studies completely ignore this, probably resulting in overestimates of the social costs attributable to gambling.
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Diagnostic instruments and cost estimate surveys ask about gamblers’ behavior.
◦ Examples on next slide Blaszczynski et al. (2006) find that without explicit instructions, respondents use different strategies in estimating their gambling losses.
◦ But some people can’t estimate losses even if they’re given calculation instructions.
◦ Serious biases in reported gambling losses are likely (p. 128) Budgets are fungible, so one cannot attribute specific expenditures to a particular revenue source 32
DSM-IV items 8. “…has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling.” If a person cannot estimate gambling losses, can they correctly attribute their crimes to its cause?
10. “…relies on others to provide money to relieve a desperate financial situation caused by gambling.” What if the person bought an expensive car, or is otherwise financially irresponsible?
How do clinicians deal with this possibility?
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SOGS items 14. “Have you ever borrowed from someone and not paid them back as a result of your gambling?” What if you dine out at fine restaurants too often? Will you attribute your financial problems to the proper cause?
16a-k. “If you borrowed money to gamble or pay gambling debts, who or where did you borrow from?” (many possible responses) How can a person attribute specific spending to specific sources of income, unless there is only one source of income?
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Clinicians may argue that it does not matter ◦ The screening instruments serve their purpose regardless 35
◦ These questions are relevant to policy since they ask about total losses and sources of money used to gamble Used in social cost estimates Abused dollars Bad debts Bailout costs Bankruptcy costs 36
Browning (1999) examines costs of government policy in the context of health care The issue is how to classify government spending related to pathological gambling behaviors ◦ Is the monetary cost incurred by government a cost of pathological gambling, or a cost of our philosophy on government and policy?
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Consider an example: ◦ Suppose the Macao government has very generous treatment reimbursement of 100% ◦ U.S. government pays only 25% of the treatment costs Then with the same number of problem gamblers, Macao’s social costs are 4 X as large If government expenditures are ‘social costs’, then we can eliminate costs by simply eliminating spending.
◦ This certainly isn’t the right way to think about social costs.
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Reuter (1999) and Kleiman (1999) are enlightening.
◦ They argue that research effort would be better spent on the effects of policy changes. ◦ Applied to gambling, since gambling is already widely available, what can we do to minimize the costs/harms?
This is similar to what public health perspectives advocate – harm minimization.
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There are strong motivations for this type of research… ◦ Politicians need data to inform and defend their decisions.
◦ “Policy entrepreneurs” want to influence policy (Krugman 1996) E.g., Grinols and Kindt want to influence policy Research funding is available ◦ But do cost-benefit studies provide good information? And are they important?
◦ They can serve as guides to the types of ◦ problems related to problem gambling Quantitatively, not so useful.
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Still relatively little is known about the economic effects of casino gambling in the U.S. and elsewhere.
There are countless research opportunities for economists.
The focus of my work has been the U.S., but the same issues arise in Macao and in other markets around the world.
Macao is similar to Las Vegas, and is likely to benefit from casinos more than many other jurisdictions.
Government-owned casinos likely have different effects. (I haven’t tested these.) 41
Doug Walker College of Charleston Dept of Econ & Finc 66 George Street Charleston, SC 29424 USA [email protected]
http://walkerd.people.cofc.edu
The Economics of Casino Gambling
©2007 Springer ISBN 978-3-540-35102-3
Chinese translation
© 2008 Yang-Chih Book Co., Taiwan ISBN 978-957-818-870-9 42