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It Could Be You! But What?s It Worth? The Welfare Gain From Lotto

Listed author(s):
  • Lisa Farrell
  • Ian Walker

This research is concerned with the demand for lottery tickets and uses data for the UK National Lottery that records the behaviour, incomes and characteristics of almost 10,000 individuals. Some of the data relates to people surveyed during a "double rollover" - the jackpot had been enhanced by adding the jackpots from the previous two weeks which had not been won. This allows us to estimate how the demand for lottery tickets varies with the rate of return since this return is higher in rollover draws. It is noticeable that richer people appear to be more likely to play in rollover weeks and we need to control for income in order to obtain unbiased estimates of the price elasticity. We find that the demand for the UL National Lottery is quite sensitive to changes in the financial rate of return arising from rollovers: a typical rollover increases the rate of return by about 10% and generates an additional 16% in sales. The income effect is negative - a lottery ticket is an example of an "inferior" good where the rich buy less than the poor: an 10% increase in income generates a fall in demand of 1.2%. But, to offset this negative income effect we find that some characteristics associated with high income (e.g. being middle aged) are positively correlated with lottery demand. We use the estimates to compute the welfare gain from the introduction of the lottery. The idea behind this is that participation in the lottery is voluntary, so only those who feel that it is beneficial to buy tickets will buy them. The implication of this is that, although consumers are, on average, ex post financially worse off after buying lottery tickets (since they are an extremely poor investment with a return that is usually approximately -55% per week) they feel better off ex ante when they buy them because of the pleasure associated with doing so. We do not know what these pleasures are but can presume that they exist from the fact that people buy this commodity wi

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Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 96/19.

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Date of creation: 1996
Publication status: Published in Journal of Public Economics, 1999, Vol. 72, pages 99-120.
Handle: RePEc:kee:keeldp:96/19
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Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom

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