Economies of scale in state lotteries: an update and statistical test

Abstract

Until 1985, research in the economics literature on state lotteries was based on the simplifying assumption that administrative costs were constant. DeBoer (1985) provided empirical evidence supporting the idea that average administrative costs are not constant, but decline with output. In other words, DeBoer found evidence for the presence of economies of scale in the provision of state lotteries. The purpose of this study is to update and improve upon DeBoer's estimation of the lottery cost function. Unlike DeBoer, we statistically test for the presence of economies of scale in the administration of state lottery games. This study suggests that large scale lottery operations by larger states have lower per-unit costs than lotteries on smaller scales. Our study firmly establishes the presence of statistically significant economies of scale in the provision of state lotteries.