Casinos and political corruption in the United States: a Granger causality analysis

Abstract

The commercial casino industry experienced an unprecedented expansion in the United States during the 1990s. As the industry has grown, so has the anecdotal evidence that links the casino industry with political corruption. However, there have been no empirical analyses of the issue. We use state-level panel data from 1985–2000 to posit a Granger causality analysis of the relationship between corruption convictions of state public officials and the predicted adoptions of casinos at the state level. We find evidence that predicted casino adoptions Granger cause corruption convictions. This finding is suggestive of a scenario of regulatory capture and may help explain why state-level gaming regulatory agencies have a history of softening gaming regulations after the initial introduction of casinos. Our study provides the first empirical evidence linking casinos to political corruption.

Keywords:

• casinos
• corruption
• Granger causality
• regulatory capture

JEL Classification:

• D73
• L83

Notes

1. The NCALG is now called Stop Predatory Gambling (http://stoppredatorygambling.org).

2. Four Illinois casinos sued over the law but recently lost in the Court of Appeals. The Court noted that the law was ‘possibly of corrupt origin,’ but that this does not affect the legality of the tax (Associated Press, 2009; Turner, 2011). Blagojevich was sentenced to 14 years in prison for his convictions (Associated Press, 2011b).

3. Tribal casinos are excluded from this study because they are introduced through a different legal framework that requires the tribe and state government to sign a compact, according to the conditions laid out in the 1988 Indian Gaming Regulatory Act. Although the compact process may also be fertile grounds for corruption, data on tribal casinos are generally not publicly available and preclude the type of empirical analysis we perform here for commercial casinos.

4. Aidt and Dutta (2008, p. 337) explain that such regulations may nevertheless serve a social purpose. One could argue that government regulation and restriction of the casino industry is warranted since some people are likely to develop gambling problems. In this sense, the casino industry may be similar to other ‘vice’ industries such as tobacco and alcohol, and may warrant a high level of regulation. Psychology research suggests that the lifetime prevalence rate of pathological gambling is around 0.5% of the US population (Shaffer and Martin, 2011, p. 486).

5. Extending the end period beyond 2000 would not enhance the analysis because there were no additional states to legalize full-scale casinos until Kansas and Ohio legalized casinos in 2007 and 2009, respectively. Including these states in the analysis would not be possible because they do not have enough full years of revenue data that could be included.

6. Since the addition of gambling machines at racetracks is usually sought by the racing industry, including these cases in our analysis would confound the casino and racing industries. An analysis of racetrack casinos (‘racinos’) or casinos with slot machines only could warrant entirely separate studies. Since 2009 or 2010, the following states have introduced either racetrack gambling machines or small commercial casinos with slot machines only, or have begun offering table games: Delaware, Florida, Kansas, Maine, Maryland, New Mexico, New York, Oklahoma, Rhode Island and West Virginia. The first stand-alone casino opened in Pennsylvania in 2007, but with machine gambling only. Table games were subsequently added beginning in mid-2010 (American Gaming Association, 2011).

7. ‘Commercial casinos’ are defined as either land-based or riverboat casinos operated by commercial companies, which offer slot machines and table games. As noted earlier, we are not examining tribal casinos, which do not publicly provide data and do not go through the same legalization/regulation process as commercial casinos. Nor do we include racinos in our model. Racinos are horse racing or greyhound racing facilities which offer slot machines or video poker machines, but not table games. These are a relatively new phenomenon, and are typically small and less controversial than the introduction of commercial casinos. More importantly, gambling machines introduced at racetracks represent legislation related to racetracks, not to commercial casinos per se.

8. Applying Granger causality to panel data is still a relatively new area of research, and there are other methods discussed in the literature. Nesbit et al. (2013) provides an alternative methodology.

9. Thornton and Batten (1985) note that a 4–4 lag structure is commonly used in Granger causality applications. Kang (1989) also discusses optimal lag length for Granger causality analysis.

10. We contacted the Department of Justice to ascertain the average time from charge to conviction. These data are not readily available, as the time depends on the charge and other case-specific information.

11. The technically appropriate term for this is ‘lag’, but we use ‘shift’ to avoid confusion with the lags discussed up to this point and after.

12. For brevity, we omit the output from the de-trending equations and lag structure analysis; the tables are available from the authors on request.

13. From the second stage of the process, discussed above, we cannot determine exactly how many lag periods are required for the residuals to become white noise. We are not as concerned with the weak results of this model specification since this is not the main focus of our analysis.

14. A listing and web page directory for the states’ gaming regulatory agencies can be found at http://www.gambling-law-us.com/Useful-Sites/State-Gambling-Agencies.htm.

15. In May 2011, the Colorado Limited Gaming Commission voted to decrease casino taxes by 5%. The Governor responded by replacing all five members of the Commission (Hoover, 2011). There have been no allegations of corruption, but there has been criticism of casino taxes being reduced at a time of state fiscal crisis and when the casino industry has been making multi-million dollar investments in the state.