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Douglas M. Walker, Ph.D. Associate Professor of Economics College of Charleston Macao Polytechnic Institute Global Gaming Management Seminar Series October.

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Presentation on theme: "Douglas M. Walker, Ph.D. Associate Professor of Economics College of Charleston Macao Polytechnic Institute Global Gaming Management Seminar Series October."— Presentation transcript:

1 Douglas M. Walker, Ph.D. Associate Professor of Economics College of Charleston Macao Polytechnic Institute Global Gaming Management Seminar Series October 23, 2009

2  Psychology, sociology, and medical ◦ Diagnosis and prevalence estimation of ‘pathological gambling’ ◦ Treatment  Economic ◦ Cost-benefit analysis  Economic impacts (employment, tax revenues, etc.)  Social costs of pathological gambling ◦ Inter-industry effects  Tax effects 2

3  Lotteries ◦ Research focus on decision to adopt, effects of expenditures (earmarking), net government revenue  Pari-mutuels ◦ Least studied; smallest industry ◦ Research on the inter-industry relationships  Casinos ◦ Some research on decision to adopt, economic effects, inter-industry effects  Others ◦ Inter-track wagering; ‘racinos’ ◦ Online poker/gambling 3

4  This paper summarizes my research on the issues listed below. ◦ It is non-technical, for a general audience [1] Determinants of casino adoption [2] Casino gambling and economic growth [3] Relationships among gambling industries and effects on tax revenues [4] The social costs of gambling [5] Measurement problems in cost-benefit analysis 4

5  Our paper follows the lottery adoption literature ◦ Seeks to explain why some states adopt lotteries ◦ Only one paper previously examined casinos (Furlong 1998)  Calcagno, Walker, and Jackson (2010) provides a comprehensive analysis ◦ Explanatory variables include state fiscal, political party, and demographic, as well as existing gambling opportunities in nearby states ◦ Findings suggest that ‘fiscal stress’ and ‘defensive legalization’ are primary motivations  Model has obvious applicability to a local or international analysis  This question is not as interesting as the effects of gambling 5

6  Commercial casinos in the U.S. appeared outside Nevada and New Jersey beginning about ◦ Very few economic studies of the casino industry prior to this ◦ Beginning in the early-mid 1990s, some anti-casino advocates began publishing articles  Yet, there was no empirical evidence in the U.S.  Examples: Goodman, Grinols, Kindt 6

7  State governments look to casinos for tax revenue and economic development. ◦ Now 12 states have commercial casinos ◦ Still few studies on casinos’ economic effects ◦ Many states are currently considering casinos.  Walker and Jackson (1998) was an early analysis of economic effects of casinos in the U.S. ◦ A follow-up study was published in

8  The study was performed in 1997, using quarterly data from ◦ Panel with 232 observations ◦ Granger causality 3-step model applied to panel data  (i) Filter trend and state-specific trends from data  (ii) Select appropriate time series process that generates each variable  (iii) Conduct Granger causality test 8

9  ‘Granger causality’ basically means that adding a past values of another variable helps to predict a particular variable.  Four possible findings: ◦ Per capita income ‘causes’ Casino revenue ◦ Casino revenue ‘causes’ Per capita income ◦ Feed-back (both variables ‘cause’ each other) ◦ No relationship  Results indicate that casino revenue Granger causes per capita income  No causality detected in the other direction 9

10  We recently repeated the analysis (Walker and Jackson 2007) ◦ Using annual data from ◦ Results indicated no Granger causal relationship  Could be the result of using annual rather than quarterly data  Results go against our earlier findings 10

11  Perhaps there is an initial short-run stimulus effect from casinos ◦ Increased demand for capital and labor ◦ Higher wages and payment to capital  Eventually this effect dies out ◦ Casinos are integrated into local economy ◦ Competition from other industries, neighboring state opportunities, online, etc. ◦ Perhaps casinos cannibalize other industries 11

12  Politicians and the casino industry argue a number of potential benefits from casinos ◦ employment ◦ higher wages ◦ consumer benefits (probably key benefit, but not a key argument)  Perhaps the most convincing political argument is tax revenues / license fees 12

13  Whether casinos provide such benefits depends, in part, on gambling industry inter-relationships  This issue has not received much attention ◦ Studies on two industries, one-way relationship ◦ Limited studies: one state, one county, short time period ◦ Results indicate industries harm each other  Are there general inter-industry relationships? 13

14  Walker and Jackson (2008b) analyze the relationships for all U.S. states, ◦ Model industry volume  casino gambling  greyhound racing  horse racing  lottery  tribal casino square footage ◦ An equation for each of the four industries, with explanatory variables including  other industry volume  adjacent state volume  demographic variables 14

15  Results are…mixed ◦ Substitutes: lottery/casino, horse/dog, ◦ Complements: horse/casino, lottery/dog, horse/lottery  Relationships among industries could be different in particular states ◦ Our study is a national panel study, but analysis of a single state could certainly yield different results ◦ Other countries may find different results too 15

16  Relationships among gambling industries obviously will affect overall tax revenues ◦ Few studies on this exist in the U.S. ◦ But some studies on lotteries…  The tax effect of adding a particular industry will depend on several factors ◦ Tax rates ◦ Relationships with other gambling industries ◦ Relationships with non-gambling industries 16

17  Walker and Jackson (2010) model total revenue by state governments ◦ Use data ◦ Dependent variable: state government revenues (net of federal transfers) ◦ Two variables measure gambling in the states  industry dummy variables to measure ‘existence’ of the industry in the state  Marginal impact variables measure volume of gambling in each industry ◦ Various other explanatory variables 17

18  Results are mixed, suggesting it is not straightforward for the ‘average’ state ◦ Lottery and horse racing ⇨ positive impact on state revenue  Lottery has relatively high ‘tax’ rate and low costs  Horse racing often has related economic development ◦ Casinos and greyhound racing ⇨ negative impact  Casinos appear to have a large ‘substitution’ effect even though they have a high tax rate  Greyhound results are questionable (extremely large)  It is unlikely that these results would apply, for example, in Nevada 18

19  Overall, our work on inter-industry relationships and tax effects indicate… ◦ The effects of casino gambling on the state economy are not straightforward. ◦ There are complicated inter-industry relationships. ◦ More state-level studies may be useful as data availability improves.  An important extension would be in which cases do casinos have a positive tax effect? 19

20  Arguably the most important area of research to which economists can contribute  Researchers with variety of academic backgrounds attempt ‘economic’ analyses  Any ‘harm’ that can remotely be connected to gambling is, and such harms are estimated and called ‘social costs.’ 20

21  Costs are typically the focus by media, politicians, and researchers. ◦ This may be a result of the once-typical illegal status of casinos: ◦ ‘Are the benefits of legalization/expansion worth the costs?’  Estimating benefits is relatively easy.  Defining and estimating costs is relatively difficult.  Costs are closely related to prevalence of pathological gambling. 21

22  Most of cost studies use this formula: 22 est. annual cost per pathological gambler X prevalence est. (%) X population est. = est. annual social cost of gambling

23  Authors rarely define ‘social cost’ before estimating it.  Studies use ad hoc methodologies, resulting in cost estimates ranging from US$9, ,000 per pathological gambler per year.  Such a large range indicates that the methodologies are not the same. 23

24  Walker and Barnett (1999) were critical of published cost estimates ◦ Argue that social cost is an decrease in aggregate societal wealth  Excludes transfers of wealth  Excludes internalized costs  These exclusions make other social scientists uncomfortable 24

25  Goodman (1994, 1995)  Grinols (2004)  Grinols and Mustard (2006)  Politzer et al. (1985)  Thompson et al. (1996, 1997, 1999)  Thompson and Quinn (2000)  Thompson and Schwer (2005)  I have some examples of specific estimates, if anyone wants to see details on this… 25

26  This issue has received more technical analysis, particularly by Grinols and Mustard (2006) ◦ They find that casinos cause crime, after a time lag. ◦ They argue that the costs associated with casino crime is significant.  There are several problems with their analysis which probably invalidate their results 26

27  The crime rate is C/P in a closed economy  If we consider a jurisdiction that has a lot of visitors (tourists), then it is appropriate to include… ◦ Crimes committed by visitors ◦ Visitors in the population at risk  The appropriate crime rate for representing the risk of being victimized: (C R +C V ) / (P R +P V ) ◦ But Grinols and Mustard use: (C R +C V ) / P R  There are other problems too… (See Walker 2008) 27

28  Even if we have an valid definition of ‘social cost’ and agree on the components, there are serious measurement problems… {a} Counterfactual scenario {b} Comorbidity {c} Survey data and fungible budgets {d} Government expenditures  If a particular study does not address these, it should probably be ignored. 28

29  For policy purposes, the economic and social effects of legalized casinos must be compared to the case in which casinos are not legal. ◦ Difficult to know…  Unless the counterfactual is what is already happening.  In some stagnant economies, one could argue that no other industry would have come (e.g., Mississippi Gulf Coast) 29

30  In terms of problem/pathological gambling… ◦ If casinos were not legal in the state, would people just go to other venues? ◦ If casinos were not available, would the pathological gamblers with coexisting disorders have more serious alcohol or drug problems?  If yes, then it is possible that the gambling legalization would lead to lower social costs even if more people would become pathological gamblers. 30

31  Problem gamblers have other disorders. ◦ This may be the biggest problem in cost-benefit analysis.  Petry, Stinson, and Grant (2005, p. 569) find: ◦ 74.2% have alcohol use disorders ◦ 38.1% have drug use disorders ◦ 41.3% have anxiety disorders ◦ 28.5% have obsessive-compulsive personality disorder  How to allocate “social costs” to gambling when most pathological gamblers have multiple disorders?  Most of the published studies completely ignore this, probably resulting in overestimates of the social costs attributable to gambling. 31

32  Diagnostic instruments and cost estimate surveys ask about gamblers’ behavior. ◦ Examples on next slide  Blaszczynski et al. (2006) find that without explicit instructions, respondents use different strategies in estimating their gambling losses. ◦ But some people can’t estimate losses even if they’re given calculation instructions. ◦ Serious biases in reported gambling losses are likely (p. 128)  Budgets are fungible, so one cannot attribute specific expenditures to a particular revenue source 32

33  DSM-IV items 8. “…has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling.”  If a person cannot estimate gambling losses, can they correctly attribute their crimes to its cause? 10. “…relies on others to provide money to relieve a desperate financial situation caused by gambling.”  What if the person bought an expensive car, or is otherwise financially irresponsible?  How do clinicians deal with this possibility? 33

34  SOGS items 14. “Have you ever borrowed from someone and not paid them back as a result of your gambling?”  What if you dine out at fine restaurants too often? Will you attribute your financial problems to the proper cause? 16a-k. “If you borrowed money to gamble or pay gambling debts, who or where did you borrow from?” (many possible responses)  How can a person attribute specific spending to specific sources of income, unless there is only one source of income? 34

35  Clinicians may argue that it does not matter ◦ The screening instruments serve their purpose regardless 35

36  These questions are relevant to policy since they ask about total losses and sources of money used to gamble ◦ Used in social cost estimates  Abused dollars  Bad debts  Bailout costs  Bankruptcy costs 36

37  Browning (1999) examines costs of government policy in the context of health care  The issue is how to classify government spending related to pathological gambling behaviors ◦ Is the monetary cost incurred by government a cost of pathological gambling, or a cost of our philosophy on government and policy? 37

38  Consider an example: ◦ Suppose the Macao government has very generous treatment reimbursement of 100% ◦ U.S. government pays only 25% of the treatment costs  Then with the same number of problem gamblers, Macao’s social costs are 4 X as large  If government expenditures are ‘social costs’, then we can eliminate costs by simply eliminating spending. ◦ This certainly isn’t the right way to think about social costs. 38

39  Reuter (1999) and Kleiman (1999) are enlightening. ◦ They argue that research effort would be better spent on the effects of policy changes.  Applied to gambling, since gambling is already widely available, what can we do to minimize the costs/harms? ◦ This is similar to what public health perspectives advocate – harm minimization. 39

40  There are strong motivations for this type of research… ◦ Politicians need data to inform and defend their decisions. ◦ “Policy entrepreneurs” want to influence policy (Krugman 1996)  E.g., Grinols and Kindt want to influence policy ◦ Research funding is available  But do cost-benefit studies provide good information? And are they important? ◦ They can serve as guides to the types of problems related to problem gambling ◦ Quantitatively, not so useful. 40

41  Still relatively little is known about the economic effects of casino gambling in the U.S. and elsewhere.  There are countless research opportunities for economists.  The focus of my work has been the U.S., but the same issues arise in Macao and in other markets around the world.  Macao is similar to Las Vegas, and is likely to benefit from casinos more than many other jurisdictions.  Government-owned casinos likely have different effects. (I haven’t tested these.) 41

42  Doug Walker College of Charleston Dept of Econ & Finc 66 George Street Charleston, SC USA 42 The Economics of Casino Gambling ©2007 Springer ISBN Chinese translation © 2008 Yang-Chih Book Co., Taiwan ISBN

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