A Tale of Two Cities: Cross-Border Casino Competition between Detroit and Windsor

Abstract

We develop a framework to study analytically and quantitatively relentless cross-border casino competition with social-disorder and income-creation externalities. Two bordering casinos compete with each other for the external source of demand of recreational and problem gamblers from the neighboring city and the two city governments set their optimal casino revenue tax and gambler tax surcharge to maximize social welfare. We show that cross-border casino gambling makes aggregate casino demand more elastic despite the addictive nature of gambling. While a lower commuting cost favors a cross-border casino in a city with a weaker taste for gambling, the positive scale effect of its own population may be offset by a negative effect on cross-border gambling. By calibrating the model to fit the Detroit-Windsor market, we find that cross-border competition induces both cities to lower casino taxes to below their pre-existing rates, while the optimal tax mix features a shift from the tax surcharge to the casino revenue tax. Our counterfactual analysis suggests that lowering the commuting cost to the pre-911 level need not have favored Windsor, whereas increasing Detroit's population to the 2000 level would have only given Windsor a modest welfare gain.