An article in the New York Times of July 25 describes the efforts of the federal government to prevent Americans from gambling online in Internet casinos located outside the United States. The article reports that 8 million Americans engage in Internet gambling, spending a total of $6 billion a year.
Gambling outside specific, authorized venues, such as Nevada (the state that has the fewest restrictions on gambling), Indian casinos, riverboat casinos, parimutuel betting at racetracks, and state lotteries, is illegal. Illegal gambling is a standard example of a radically underenforced, "victimless" crime ("victimless" in the sense of being a voluntary transaction, as distinct from a coerced transaction such as theft. The gambling laws are underenforced largely because gambling is victimless, which makes detection difficult and also reduces the public‚Äôs willingness to devote resources to preventing it. The argument for criminalization is that gambling is an unproductive and often an addictive activity that, by virtue of its addictive character, drives the gambling addicts to bankruptcy.
In fact gambling is productive in an economic sense because it increases the expected utility of the gamblers; otherwise there wouldn't be gambling. It is as productive as any other leisure-time activity that does not involve the acquisition of useful skills or knowledge. Granted, the attraction of gambling is a little mysterious from a rational-choice perspective. Because of the need of the casino or other gambling establishment to cover its costs, the gambles that are offered are bad in the sense that the net expected monetary payoff is negative. The state lotteries derive significant revenues (an average of 2.3 percent in the 40 states that have state lotteries) from the sale of lottery tickets precisely by offering particularly bad odds: on average, of every $1 dollar in revenue from the sale of lottery tickets, only 50¬¢ is paid out in winnings.
So only risk preferrers should derive net expected utility from gambling. Yet most gamblers probably have health, homeowners', and other forms of insurance and thus demonstrate risk aversion. For just as only a risk preferrer will accept bad gambles, so only a risk averter would buy insurance, since the insurance company‚Äôs loading fee makes the net expected monetary payoff from insurance negative.
Some people believe irrationally that they are inherently "lucky," not realizing that "luck" is something observed ex post; no one has an asset called "luck" that enables him to beat the odds. Other people are so desperate or miserable that their marginal utility of money is very low, which truncates the downside risk of a gamble. Suppose, to take an extreme case, that you have only $1 left in the world. There isn't much you can do with $1, so, even if if you were risk averse, your most sensible move might be to buy a lottery ticket, on the theory that it is really costless. (Thus, welfare programs encourage gambling by reducing the cost of gambling away one‚Äôs financial resources.) The principle that this example illustrates is that if marginal utility is increasing in income, the benefit of winning a bet and thus increasing one‚Äôs income will confer more utility than an equal loss will confer disutility.
And finally, there is an inherent human fascination with uncertainty and randomness, and these features of our environment and experience can be observed with particular clarity in gambling. In this respect, gambling is a consumption good rather than an investment good.
It is true that some people become addicted to gambling and go broke. A 2000 study by the economists John Barron, Michael Staten, and Stephanie Wilshusen estimated that an abolition of casino gambling would reduce personal bankruptcies by 1.4 percent nationwide and by 8 percent in counties in which or near which casionos were located. However, given the enormous number of people who gamble, the percentage who go broke as a consequence of their gambling must be very small. This raises a serious question whether the harmless activity of a vast number of people should be curtailed to protect the small fraction who become addicted to it and as a result engage in self-destructive behavior.
If gambling addiction is considered a genuine mental disorder rather than a preference, it perhaps could be controlled by "suitability rules" (a weak "perhaps"‚Äîthe costs of enforcement might well be prohibitive) that would limit the percentage of a person's income or assets that he could spend on gambling. This would be a counterpart to the suitability rules that forbid securities brokers to buy highly risky securities for people for whom such investments are "unsuitable" by virtue of their financial situation.
Addiction to gambling is more costly the more difficult it is to declare bankruptcy and thus wipe out one's debts. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did just that: made it more difficult to declare nonbusiness bankruptcies. It will be interesting to see whether the Act reduces the amount of gambling and gambling-related bankruptcies.
The addiction argument is pressed in the legislative arena by the casinos and the other legal gambling establishments in support of restricting other gambling. The establishments argue that they try to prevent their customers from bankrupting themselves. But as far as I know, this is true only in the sense that they make sure that their customers can pay their losses.
Internet gambling poses a strong competitive threat to the conventional legal gambling establishments, including state lotteries. Those establishments have high overhead expenses--large staffs, expensive equipment (one-arm bandits, casino buildings, casino boats)--with the exception of the state lotteries, but the states, as I have noted, depend upon them as a revenue source, in lieu of taxes, which are unpopular. (The purchase of a state lottery ticket is a voluntary tax payment of one half the ticket price.) Moreover, except for the lotteries, legal gambling imposes substantial time costs on the gamblers, who have to travel to the casino or the racetrack to place a bet. It is because of the overhead expenses and the states' revenue hunger that the odds offered the gambler are so bad (they are even worse, when the time cost of the gambler is added). There may also be monopoly rents further worsening the odds, since competition in the gambling industry is so restricted in most states, a factor in the recent Abramoff scandal involving efforts to prevent competition with Indian casinos.
Internet gambling establishments have very low expenses, enabling them to offer an approximation to fair odds, and do not require any travel by the gambler. One would think fair odds an enormously attractive feature of Internet gambling to gamblers. At fair odds, which is to say with no loading expense (a gamblers' nirvana that Internet gambling, if allowed to operate without threat of criminal prosecution--which obviously drives up its costs--might approximate), the net utility of gambling soars because there is no longer a net expected financial loss.
So the legal casinos are correct that they offer a measure of control over gambling: by offering only bad odds, they reduce the demand for their product. (The analogy is to the monopolistic provision of a product, which by reducing demand reduces the amount of pollution generated by the manufacture of the product.) It is doubtful, however, that this effect justifies the elaborate legal restrictions on the gambling industry.