Where the money goes: the role of funding allocation in lottery markets

ABSTRACT

A key characteristic of state-authorized lotteries is that they are required by law or through their licenses to make payments to society (in the form of taxes paid to the treasury, duties, funds to sports, or funds for other good causes). So state lotteries serve to some extent as a public finance tool. This paper aims to study how lottery markets around the world respond to different funding allocation strategies, but also how lottery sales respond to the macroeconomy. These are crucial issues to enable these markets to confront future challenges and to maintain lottery payments for society. Consequently, an economic-related approach is taken to investigate the role of funding allocation in lottery markets from an international perspective using panel data information from The WLA Global Lottery Data Compendium. The empirical findings show a negative relationship between lottery sales and financial contributions to society. However, relevant differences exist depending on the funding strategy adopted, and a positive link between sales revenue and allocating funds to education or social purposes is observed. Overall, it is found that lottery is a normal good and as an implicit tax, regressive.

KEYWORDS:

• Lottery markets
• demand
• funding allocation
• good causes
• international comparison

Acknowledgements

We thank Prof. David Forrest for fruitful discussion during the course of the project.

Disclosure statement

No potential conflict of interest was reported by the authors.

Constraints on publishing

No constraints on publishing have been imposed.

Competing interests

The authors declare that they have no competing interests.

Notes

1. The use of lotteries as a public finance tool remains controversial. Those opposed to the use of lotteries have based their objections on issues such as the regressivity of lottery tax as well as moral considerations (Skidmore & Tosun, 2008). On the other hand, lottery supporters use the good causes and funding allocation argument.

2. The Swedish operator, AB Svenska Spel, allocated on average 60% of sales revenue to public purposes during the sample period. This figure increased to 69.32% in 2014. In any case, it should be noted that this includes not only the funding allocating to either good causes or the public treasury, but also taxes and other mandatory payments.

3. As public policy is often affected by historical, cultural, and local political factors, as authorized-lottery markets proliferate, regulatory issues will continue to be treated differently in each jurisdiction.

4. This data has been obtained from World Bank Open Data – https://data.worldbank.org/.

5. In order to determine whether the panel data model is fixed effects or random effects, a Hausman (1978) specification test is performed suggesting the use of random effects is appropriate.

6. It should be pointed out that part of the geographical variability of the population is captured by the world region dummies.

Additional information

Funding

No funding source to be declared.

Notes on contributors

Alvaro Muñiz

Álvaro Muñiz is a PhD candidate in economics at the University of Cantabria.

Levi Pérez

Levi Pérez is associate professor of economics in the Department of Economics at University of Oviedo. He received his PhD in economics from the University of Oviedo. He holds a university expert degree in Advanced Methods in Applied Statistics from the National University of Distance Education (UNED).