1. SEIGs, GPIs, and BCAs: Playing to Different Stakeholders Dennis Coates and Scott Farrow Department of Economics UMBC 1 www.umbc.edu

2. Outline SEIG Regional Issues BCA Issues Conclusion 2

3. SEIG is Problematic Criticisms not new – Walker (2008) Impact themes overlap – Double counting – Dubious categorization of costs and benefits Impact theme relative importance unclear – Politically determined – Not transparent 3

4. Examples Personal entertainment – Health and Well-Being – Economic and Financial – Recreation and Tourism Contribution to economic growth – Economic and Financial: Contribution to GDP – Economic and Financial: Changes in investment, etc – Employment and Education: Direct and indirect job creation – Employment and Education: Annual and hourly wages 4

5. SEIG is Problematic 2 Who are the stakeholders/decision-makers? – General Public – Gambling “Interests” – Policy makers and politicians Unstructured information may be better than none at all – Unbiased/disinterested research – Value judgments left to stakeholders 5

6. SEIG is Problematic Summary Flexibility or All things to all people Adding Lemons and Cherries? Conflating Positive with Normative 6

7. Focus on two topics: Regional analysis – Unit of Analysis – Spillovers – Economic Development – Interjurisdictional competition BCA – Impacts or markets – Surplus or risk loving uncertainty – Problem or pathological gamblers – Equity 7

8. Issues in Regional Analysis Unit of Analysis Interjurisdictional Competition Spillovers Economic Development 8

9. Unit of Analysis Anielski and Bratten SEIG – Four possibilities Individual, Household Community – neighborhood, town or city; clubs or interest groups; may be geographic but need not be Regions – “larger geographic areas than communities” Province – Two Unanswered Questions What is the political jurisdiction for the analysis? Given the political jurisdiction, how wide-spread is access to gambling? 9

10. Spillovers/Externalities What is the jurisdiction of the analysis? Vaillancourt and Roy identify geographical dimension as one of two significant methodological issues – rationale for Canada as unit of analysis Smaller geographic area, the better for extracting benefits from those other jurisdictions/populations Smaller geographic area, the more likely to export costs onto other jurisdictions/populations 10

11. Spillovers Fiscal Federalism – Multiple jurisdictions – Boundaries set so costs and benefits are captured Costs – Gambling – Travel, etc Benefits – Gambling – Other 11

12. Economic Development Job creation – Gambling – Induced Income growth – Gambling – Induced Tax revenues Neighborhood revitalization? 12

13. Interjurisdictional Competition Gambler mobility – Slot machines in MD – More venues in BC, AU On the border – Attract gamblers from neighbors – Retain home grown gamblers – Spillovers (MA and CT) Race to the Bottom 13

14. Selected Issues in GPIG & BCAG 1.GPIG 2.BCAG – Logic models and Surplus – Uncertainty – Problem or pathological gamblers – Equity 14

15. GPIG Within SEIG: Several valuation methods mentioned, including GPIG and BCA. GPIG: suggestion to use modified National Income and product accounts (e.g. GDP) – History of concern in GDP for adjustments (household labor, environment (net dep)… – GDP: C+I+G+net exports or income (flow, not stock/balance sheet) 15

16. GPIG: doesn’t resolve issues GPIG comments (e.g. Anielski, GPINovaScota) – Not implementing national income accounting : only identify candidates as subset of SEIG – Double counting: GDP of gambling + personal expenditures – Should personal expenditures be wagers net of payouts as suggested? Aren’t expenditures the wagers and the payouts income? – Inequality adjustment: more later, how to investigate value judgment? – Usual co-morbidity issues – Property value (NIPA is a flow net of depreciation, property would need separate balance sheet) – Cost of bankruptcy, lost productivity: these are mediated in part through markets; expected to be built into wages and risk based interest rates, – Addiction: change in surplus mentioned but actually change in expenditure (no surplus measures in GDP), more later 16

17. Logic Model: SEIG, GPIG, and BCA Region or Province is central actor? What is causing what? 17

18. Gambling market Consumers: CS Producers: PS (WTP: Risk Loving) Government Revenues and expenditures Input Markets Labor Market Gambler’s income Regional employment Labor Market Gambler’s income Regional employment Financial Markets Borrowing/lending External Effects Household Crime Community Partial Equilibrium (can extend to general equilibrium) Standing: Whose impacts count…e.g. Provincial BCA: Links among markets, Gov’t and Externalities 18 Legal conditions and multiple market interactions

19. Is Gambling Consumer Well Analyzed? Fundamental issue of consumer behavior Gamblers must be risk loving in this activity since the payout is less than “fair” Complex links between surplus and Willingness to Pay with uncertainty (latter preferred with uncertainty): – Broader economic literature not resolved (expected and non-expected utility) people such as two nobel prize winners (Freidman, Markovitz) Current candidates: Consumer “expenditures”, but that is usually that is what is deducted from total benefits to get consumer surplus Standard surplus (Grinols…at margin no effect)-- Distance surplus, but no link to change in price (Grinols) What happened to valuation under uncertainty? 19

20. Expenditures and Surplus contrasted Fundamentally different measures 20

21. Risk Loving, and Paying to Gamble at point of indifference (Contrasts: Insurance--paying not to gamble) Gamblers: Z= ex-ante WTP for access to gamble (including travel and house take); if cost is less, a “surplus” but not the standard surplus. Utility Z E(U(G))=U(I) 21 IncomeI E(I)

22. WTP to gamble and change in location (related to “distance surplus”) Z G Gambler: WTP ex-ante for gamble can include – Fixed fee (travel) – House/state take – “surplus” if doesn’t have to pay the full amount – If gambling location gets closer, same WTP but more may go for gambling and/or surplus, gamble more Z NG Non-gambler: may have WTP in a smaller amount that is not sufficient to travel so no observed “gamble”; as locations get closer, then Z NG may be sufficient to gamble; new entry of gambling. Price of gamble is extracted from WTP If offered better gamble (e.g. “looser slots”) at least willing to pay earlier amount and may get added utility surplus. 22

23. Problem or Pathological Gamblers Consumer sovereignty or not? – Standard model: people responsible and understand own actions – Non-standard model (some aspects of Behavioral economics) Lack of control (some with WTP to be “normal”), then a modest surplus loss ( Australian report or Vining and Weimer (JBCA, 2011) based on gambling to P&P gamblers that returns less than expected. Other behavioral: could be issues in lack of understanding of probabilities 23

24. Surplus Loss from Addiction (Vining/Weimer/Thomas) smoking, ~25% loss in Total Surplus – Preliminary oddity: if only use distance surplus as consumer benefit, then addiction adjustment appears small. 24

25. Equity and BCA Increasing attention with new Administration in U.S. and regulatory analysis Standard approach in textbooks is to consider distributional weighting using marginal utility of income for different income classes, but lack of agreement on weights – Sensitivity: default in BCA is equal MU(income) which is an Atkinson weight of 0. – As an assumption, easily varied, perhaps to find cross-over point – Some guidance; UK Greenbook for regulatory analysis specifies Atkinson weight of 1; US Census reports.25,.5,.75 – Example from Analysis of VLTs in Maryland (Farrow and Shinogle) 25

26. 26 Distributional weights based on values of inequality aversion, e, used by the U.S. Census Bureau and the UK Treasury

27. 27 Short example: VLT’s in Maryland Base case: positive (but uncertain) Net Benefits

28. 28 Distributional Weights: Can change sign

29. Summary What can be learned from gambling analyses SEIGs and GPIGs: potential impacts of interest to various stakeholders Regional Issues: spillovers, race to the bottom BCA issues: framework exists but lacks central WTP measure based on gambling; can include addiction and equity. 29

30. Extra slides 30

31. 31 Simulation results (using @Risk with Excel)