Does a state lottery simply redirect money people would otherwise spend on gambling, or does it take money away from other household purchases? Melissa Schettini Kearney examines that question using household consumption and gambling data in State Lotteries and Consumer Behavior, published in the Journal of Public Economics in December 2005. The linked NBER working paper dates to November 2002.
- Other gambling does not explain the spending. The paper finds that lottery spending does not substitute for other forms of gambling.
- Ordinary consumption falls. The NBER abstract reports approximately $38 a month, or 2%, of other household consumption crowded out by lottery gambling. These are historical dollar amounts from the study, not inflation-adjusted figures for today.
- The relative burden is larger for poorer households. Low-income households experience larger proportional reductions in other consumption.
That makes the paper useful for understanding the distributional cost of state lotteries: public revenue is not simply coming from an existing gambling budget. Some of it comes at the expense of other household spending, with a heavier relative burden at the bottom of the income distribution.
The findings do not establish that all lottery players misunderstand the odds. Kearney also finds that demand responds positively to a game’s expected return, suggesting purchases may be informed. Nor does this study measure the net effect of every form of gambling legalization or account for every possible use of lottery revenue. Its contribution is narrower: identifying what lottery purchases displace, and who gives up the largest share of other consumption.