The Optimal Design of State-Run Lotteries

106 Pages Posted: 28 Jun 2021 Last revised: 3 Sep 2021

See all articles by Benjamin B Lockwood

Benjamin B Lockwood

University of Pennsylvania - The Wharton School

Hunt Allcott

New York University (NYU)

Dmitry Taubinsky

University of California, Berkeley - Department of Economics

Afras Y. Sial

University of Pennsylvania

Date Written: June 2021

Abstract

People have long debated whether state-run lotteries exploit the poor or are a win-win that generates enjoyment and government revenues. We study socially optimal lottery design in an optimal taxation framework with biased consumers and estimate sufficient statistics for optimal policy. Lottery sales respond more to changes in jackpot expected values than to changes in price or lower prizes, consistent with a specific type of probability weighting. In our survey, bias proxies such as innumeracy decline with income and explain 43 percent of lottery spending. In our model, current multi-state lottery designs increase welfare but may harm heavy-spending low-income people.

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Suggested Citation

Lockwood, Benjamin B and Allcott, Hunt and Taubinsky, Dmitry and Sial, Afras Y., The Optimal Design of State-Run Lotteries (June 2021). NBER Working Paper No. w28975, Available at SSRN: https://ssrn.com/abstract=3875142

Benjamin B Lockwood (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Hunt Allcott

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

Dmitry Taubinsky

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

Afras Y. Sial

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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