What Drives Demand for State-Run Lotteries? Evidence and Welfare Implications

108 Pages Posted: 28 Jun 2021 Last revised: 3 Mar 2025

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

We use natural experiments embedded in state-run lotteries and a new nationally representative survey to provide reduced-form and structural estimates of risk preferences and behavioral biases in lottery demand. We find that sales respond more to the expected value of the jackpot than to price, but are unresponsive to variation in the second prize—a pattern that implies probability weighting but is inconsistent with standard parameterizations. In the survey, we find that lottery spending decreases modestly with income and is strongly associated with measures of innumeracy, poor statistical reasoning, and other proxies for behavioral bias. These bias proxies decline with income and statistically account for 43 percent of lottery purchases, suggesting that at least some of lottery demand is due to behavioral bias, not just anticipatory utility or entertainment value. We use these empirical moments to estimate a model of socially optimal lottery design. In the model, current multi-state lottery designs increase welfare but may harm heavy spenders.

Suggested Citation

Lockwood, Benjamin B and Allcott, Hunt and Taubinsky, Dmitry and Sial, Afras Y., What Drives Demand for State-Run Lotteries? Evidence and Welfare Implications (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
20 Cooper Square 3rd Floor
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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