The Impact of Cross-State Lottery Competition on Revenues and Economic Welfare: An Empirical Analysis

There exists a well-established literature identifying several important demand determinants of lottery tickets. These studies estimate demand functions over a wide variety of cross sectional and time series data, leading to several robust conclusions . First, lottery tickets are an inferior good, implying that this particular form of state revenue generation is regressive in nature. Second, lottery sales appear to be negatively affected by education and positively affected by a greater proportion of nonwhite potential participants. Given the recent downturn in many states\u27 budget position, and the generally unpopularity of general tax increases, many state politicians have explored other revenue sources such as cigarette excise taxes, increases in user fees, and lottery proceeds. As such, there has been a renewed interest in the determinants of lottery sales, and the corresponding welfare implications of this good. This paper, diverges from previous work by exploring the impact of competing lottery goods from bordering states on lottery sales in Virginia counties. Thus, the empirical approach is to estimate a demand function for lottery sales across counties within Virginia that explicitly measures the flows of sales into and/or out of counties adjacent to other states (and their competing lottery offerings). The study finds inflow and outflow patterns that are highly consistent with consumers within border counties migrating across state borders to pursue (arguably) more beneficial lotteries to a significant degree. This result not only has important welfare implications but also has a large and significant impact on resulting revenue streams