The Economic Effects - PowerPoint Presentation

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The Economic Effects of Casino Gambling: A Perspective from the U.S.

Douglas M. Walker, Ph.D.

Associate Professor of Economics

College of Charleston

Macao Polytechnic Institute

Global Gaming Management Seminar Series

October 23, 2009Slide2

Psychology, sociology, and medicalDiagnosis and prevalence estimation of ‘pathological gambling’TreatmentEconomic

Cost-benefit analysis

Economic impacts (employment, tax revenues, etc.)Social costs of pathological gamblingInter-industry effectsTax effects

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Overview of gambling researchSlide3

LotteriesResearch focus on decision to adopt, effects of expenditures (earmarking), net government revenuePari-mutuels

Least studied; smallest industry

Research on the inter-industry relationshipsCasinosSome research on decision to adopt, economic effects, inter-industry effects

OthersInter-track wagering; ‘racinos

’

Online poker/gambling

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Research on

U.S. industriesSlide4

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

4My casino research focusSlide5

Our paper follows the lottery adoption literatureSeeks to explain why some states adopt lotteriesOnly one paper previously examined casinos (Furlong 1998)Calcagno, Walker, and Jackson (2010) provides a comprehensive analysisExplanatory 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 analysisThis question is not as interesting as the effects of gambling

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[1] Determinants of casino adoptionSlide6

Commercial casinos in the U.S. appeared outside Nevada and New Jersey beginning about 1989.Very few economic studies of the casino industry prior to thisBeginning in the early-mid 1990s, some anti-casino advocates began publishing articlesYet, there was no empirical evidence in the U.S.Examples: Goodman, Grinols,

Kindt

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Casino gambling and economic growthSlide7

State governments look to casinos for tax revenue and economic development.Now 12 states have commercial casinosStill 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 2007

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The study was performed in 1997, using quarterly data from 1991-96Panel with 232 observationsGranger 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 test8

Do casinos cause economic

growth?Slide9

‘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 revenueCasino revenue

‘causes’

Per capita incomeFeed-back (both variables ‘cause’ each other)No relationshipResults indicate that casino revenue Granger causes per capita income

No causality detected in the other direction

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We recently repeated the analysis (Walker and Jackson 2007)Using annual data from 1991-2005Results indicated no Granger causal relationshipCould be the result of using annual rather than quarterly

data

Results go against our earlier findings10

Follow-up studySlide11

Perhaps there is an initial short-run stimulus effect from casinosIncreased demand for capital and laborHigher wages and payment to capitalEventually this effect dies out

Casinos are integrated into local economy

Competition from other industries, neighboring state opportunities, online, etc.Perhaps casinos cannibalize other industries

11Short-run and long-run effectsSlide12

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

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[3] Inter-Industry RelationshipsSlide13

Whether casinos provide such benefits depends, in part, on gambling industry inter-relationships This issue has not received much attentionStudies on two industries, one-way relationshipLimited studies: one state, one county, short time period

Results indicate industries harm each other

Are there general inter-industry relationships?13Slide14

Walker and Jackson (2008b) analyze the relationships for all U.S. states, 1985-2000Model industry volumecasino gambling greyhound racing

horse racing

lotterytribal casino square footage An equation for each of the four industries, with explanatory variables including other industry volume

adjacent state volume demographic variables

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Results are…mixedSubstitutes: lottery/casino, horse/dog, Complements: horse/casino, lottery/dog, horse/lotteryRelationships among industries could be different in particular statesOur study is a national panel study, but analysis of a single state could certainly yield different results

Other countries may find different results too

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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 ratesRelationships with other gambling industriesRelationships with non-gambling industries

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Gambling

industries and state taxesSlide17

Walker and Jackson (2010) model total revenue by state governmentsUse 1985-2000 data Dependent variable: state

government revenues (net of federal

transfers)Two variables measure gambling in the statesindustry dummy variables to measure ‘existence’ of the industry in the stateMarginal impact variables measure volume of gambling in each industry

Various other explanatory variables

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Results are mixed, suggesting it is not straightforward for the ‘average’ stateLottery and horse racing ⇨ positive impact on state revenueLottery has relatively high ‘tax’ rate and low costs

Horse racing often has related economic development

Casinos and greyhound racing ⇨ negative impactCasinos appear to have a large ‘substitution’ effect even though they have a high tax rateGreyhound results are questionable (extremely large)

It is unlikely that these results would apply, for example, in Nevada

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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?

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Arguably the most important area of research to which economists can contributeResearchers with variety of academic backgrounds attempt ‘economic’ analysesAny ‘harm’ that can remotely be connected to gambling is, and such harms are estimated and called

‘social

costs.’20

[4] Social costs of gamblingSlide21

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.

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Why the focus on costs?Slide22

Most of cost studies use this formula:

22Calculating social costs

est. annual cost per pathological gambler

X prevalence est. (%)

X population est.

= est. annual social cost of gamblingSlide23

Authors rarely define ‘social cost’ before estimating it.Studies use ad hoc methodologies, resulting in cost estimates ranging from US$9,000-50,000 per pathological gambler per year.Such a large range indicates that the methodologies are not the same.

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Variation in cost estimatesSlide24

Walker and Barnett (1999) were critical of published cost estimatesArgue that social cost is an decrease in aggregate societal wealthExcludes transfers of wealthExcludes internalized costsThese exclusions make other social scientists uncomfortable

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Economic definition of ‘social cost’Slide25

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…

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Examples of problematic studiesSlide26

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

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Casinos and crimeSlide27

The crime rate is C/P in a closed economyIf we consider a jurisdiction that has a lot of visitors (tourists), then it is appropriate to include…Crimes committed by visitorsVisitors in the population at riskThe appropriate crime rate for representing the risk of being victimized: (C

R

+CV) / (PR+PV)But Grinols and Mustard use: (CR+C

V) / PRThere are other problems too… (See Walker 2008)

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Grinols and Mustard (2006)Slide28

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 expendituresIf a particular study does not address these, it should probably be ignored.

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[5]

General Problems in Estimating Social Costs of GamblingSlide29

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

{a} Counterfactual scenarioSlide30

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.

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Counterfactual scenario, cont.Slide31

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 disorders28.5% have obsessive-compulsive personality disorderHow 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.

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{b} ComorbiditySlide32

Diagnostic instruments and cost estimate surveys ask about gamblers’ behavior.Examples on next slideBlaszczynski

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

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{c} Surveys

and fungible budgetsSlide33

DSM-IV items8. “…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

DSM-IV criteriaSlide34

SOGS items14. “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?

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SOGS criteriaSlide35

Clinicians may argue that it does not matterThe screening instruments serve their purpose regardless35

Caveat Slide36

These questions are relevant to policy since they ask about total losses and sources of money used to gambleUsed in social cost estimates

Abused dollars

Bad debtsBailout costsBankruptcy costs36

Relevance of diagnostic tools to cost estimatesSlide37

Browning (1999) examines costs of government policy in the context of health careThe issue is how to classify government spending related to pathological gambling behaviorsIs the monetary cost incurred by government a cost of pathological gambling, or a cost of our philosophy on government and policy?

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{d} Government spending and ‘fiscal externalities’Slide38

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 largeIf 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.

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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.

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Critiques of C-B AnalysesSlide40

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 policyResearch funding is availableBut 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.

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Should we even try to measure costs and benefits of casinos?Slide41

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.)

41ConclusionsSlide42

Contact InformationDoug WalkerCollege of CharlestonDept of Econ &

Finc

66 George StreetCharleston, SC 29424USAWalkerD@cofc.edu

http://walkerd.people.cofc.edu

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The Economics of Casino Gambling

©

2007 Springer

ISBN

978-3-540-35102-3

Chinese translation

©

2008 Yang-

Chih

Book Co., Taiwan

ISBN

978-957-818-870-9