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Willingness to pay and the demand for lotto

  • Jen-Hung Wang
  • Larry Tzeng
  • Junji Tien
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    Why do many bettors participate in an unfair gamble, in particular a lotto game, while at the same time purchase insurance? The willingness-to-pay for lotto is analysed to find a 'rational' explanation for a (local) risk-averter's participation in an unfair bet. A reasonable case is found where bettors' preference can be approximately characterized as a locally risk-averse and sufficiently prudent cubic function. Such bettors dislike risk but prefer standard third moment of the payoff. The result suggests that the traditional effective price for lotto demand may omit important explanatory variables. We thus propose an alternative method to examine the demand for lotto by incorporating the second and the third moments of lotto's payoff. Evidence from Taiwan Lotto data supports that lotto bettors could be both (locally) risk-averse and rational.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500405938
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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 38 (2006)
    Issue (Month): 10 ()
    Pages: 1207-1216

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    Handle: RePEc:taf:applec:v:38:y:2006:i:10:p:1207-1216
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    1. David Forrest & O. David Gulley & Robert Simmons, 2000. "Testing for rational expectations in the UK National Lottery," Applied Economics, Taylor & Francis Journals, vol. 32(3), pages 315-326.
    2. David Forrest & O. David Gulley & Robert Simmons, 2004. "Substitution between games in the UK national lottery," Applied Economics, Taylor & Francis Journals, vol. 36(7), pages 645-651.
    3. Farrell, Lisa & Walker, Ian, 1999. "The welfare effects of lotto: evidence from the UK," Journal of Public Economics, Elsevier, vol. 72(1), pages 99-120, April.
    4. O. Homer Erekson & Glenn Platt & Christopher Whistler & Andrea Ziegert, 1999. "Factors influencing the adoption of state lotteries," Applied Economics, Taylor & Francis Journals, vol. 31(7), pages 875-884.
    5. M. Cain & D. Peel & D. Law, 2002. "Skewness as an explanation of gambling by locally risk averse agents," Applied Economics Letters, Taylor & Francis Journals, vol. 9(15), pages 1025-1028.
    6. Farrell, Lisa, et al, 2000. "The Demand for Lotto: The Role of Conscious Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(2), pages 228-41, April.
    7. Ian Walker, 1998. "The economic analysis of lotteries," Economic Policy, CEPR;CES;MSH, vol. 13(27), pages 357-402, October.
    8. Farrell, Lisa & Morgenroth, Edgar & Walker, Ian, 1999. " A Time Series Analysis of U.K. Lottery Sales: Long and Short Run Price Elasticities," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 513-26, November.
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