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Essays on State Lottery Demand and Revenue Earmarks University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Doctoral Dissertations Graduate School 12-2011 Essays on State Lottery Demand and Revenue Earmarks Kara Diane Smith Mitchell UT, [email protected] Follow this and additional works at: https://trace.tennessee.edu/utk_graddiss Part of the Public Economics Commons Recommended Citation Mitchell, Kara Diane Smith, "Essays on State Lottery Demand and Revenue Earmarks. " PhD diss., University of Tennessee, 2011. https://trace.tennessee.edu/utk_graddiss/1207 This Dissertation is brought to you for free and open access by the Graduate School at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Doctoral Dissertations by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. To the Graduate Council: I am submitting herewith a dissertation written by Kara Diane Smith Mitchell entitled "Essays on State Lottery Demand and Revenue Earmarks." I have examined the final electronic copy of this dissertation for form and content and recommend that it be accepted in partial fulfillment of the requirements for the degree of Doctor of Philosophy, with a major in Economics. Michael K. Price, Major Professor We have read this dissertation and recommend its acceptance: Don Bruce, William Neilson, Nicholas Nagle Accepted for the Council: Carolyn R. Hodges Vice Provost and Dean of the Graduate School (Original signatures are on file with official studentecor r ds.) Essays on State Lottery Demand and Revenue Earmarks A Dissertation Presented for the Doctor of Philosophy Degree The University of Tennessee, Knoxville Kara Diane Smith Mitchell December 2011 Copyright © 2011 Kara Diane Smith Mitchell All rights reserved. ii Dedication This dissertation is dedicated to my husband, Trent, for his patient support and gracious endurance of the vicissitudes of graduate student life. iii Acknowledgements This dissertation represents the culmination of five years as a graduate student at the University of Tennessee. In that time, I have been the recipient of an outstanding graduate education at the hands of a cadre of excellent teachers and mentors. In particular, I am grateful to Michael Price for his guidance, patience, and encouragement over the last two years. He has been generous with his time and has clearly demonstrated what it means to be a thoughtful, thorough, and clever researcher. Through this entire process and, especially, in the final year of graduate school, Don Bruce has been an invaluable ally in his roles as graduate director, committee member, and advocate. He provided close, thorough readings of this document which improved it considerably. I also appreciate his frank and prudent advice as I navigated the transition to post-graduate school life. I am thankful for the roles that William Neilson and Nicholas Nagle played as members of my committee. They each made contributions which led this final document to be a better addition to the literature. Along the way, this research has also benefitted from the comments and feedback of Matthew Murray, William Fox, and Celeste Carruthers. I am grateful to the Tennessee Education Lottery Corporation, the Tennessee Department of Finance and Administration’s Division of Budget, and the Texas Lottery Commission for providing the data that made this project possible. I also thank Robert Bohm and the Center for Business of Economic Research for three and a half years of funding. This research would have been more difficult if not for the expertise of Vickie Cunningham and Brian Douglas which was always eagerly shared. My road at UT has also been smoothed by Susan McGee, Donna Kemper, and Betty Drinnen. Not only do they have The Answer to every administrative question that exists, they have provided genuine encouragement and enthusiasm for me when I was drained by the weeks away from home. Furthermore, I have been very fortunate to form friendships with colleagues like Valentina Kozlova, Rebekah McCarty, Maria Sarigiannidou, Zach Richards, Bryan Shone, Steve Cotton, and others that have been available to discuss a research problem or iv to take my mind off research, depending on the need. I hope to remain in contact with these folks for many years. My family deserves a great deal of thanks for helping me reach this juncture. My parents, Randy and Diane Smith, taught me the importance of education and funded a great deal of it. My brother, Andrew, embodies the traits that make a true scholar and sets a fine example for his sister. Though not related by blood, I am grateful to Ginny and Kaleb Center for giving me a home in Knoxville. I simply would not have finished this project without their place in my day-to-day life. They are the best kind of people. Above all else, I thank Trent Mitchell for all that he has given up so that I could fulfill this ambition. There were too many nights away from home and too much work when I was there. Despite this, his support has been absolute and abiding. To him, this work is gratefully dedicated. v Abstract Since the first modern state-sponsored lottery was instituted in New Hampshire in 1964, lotteries have proliferated to 42 states and the District of Colombia. With little exception, research has shown that these lotteries are a highly regressive form of taxation. However, this body of research does not take into account a theoretical finding that the manner in which collected funds are earmarked impacts participation patterns. The goal of this dissertation is to test this finding empirically. In the first analysis, I use sales data from the Tennessee Education Lottery and scholarship data from the TEL Scholarship program to test this theory directly. I find that instant game sales are increasing in the number of scholarships awarded in a given county and that the implicit tax incidence is less regressive than in certain other states. I also find that the relationship between scholarships and sales is stronger in higher income counties. Theory does not hold for Powerball sales. This may be due to a misconception that buying into a multi-state game does not directly subsidize programs in Tennessee. In the second analysis, I focus on the Texas Lottery, which began as a revenue stream for the state’s General Fund, but eventually became a dedicated revenue stream for K-12 education. I exploit this change to test for a structural break in the demand for two lottery games. Then, I extend an existing theory of lottery demand to take this structural break into account. I find that there is a structural break at the time the earmark is implemented, and that the lottery is less regressive after the earmark. vi Contents Chapter 1 The Economics of State Lotteries ..................................................................... 1 1.1 Introduction ............................................................................................................... 1 1.2 Prior Literature .......................................................................................................... 2 1.3 Theory ....................................................................................................................... 6 Chapter 2 The Tennessee Education Lottery Scholarship Program and Lottery Sales ...... 8 2.1 Introduction ............................................................................................................... 8 2.2 Tennessee Education Lottery Corporation................................................................ 9 2.3 Data and Methods ................................................................................................... 11 2.4 Results ..................................................................................................................... 17 2.5 Conclusions ............................................................................................................. 28 Chapter 3 Testing for a Structural Break in Demand for Two Texas Lottery Games ...... 31 3.1 Introduction ............................................................................................................. 31 3.2 Texas Lottery .......................................................................................................... 32 3.3 Data and Methods ................................................................................................... 32 3.4 Results ..................................................................................................................... 37 3.5 Conclusions ............................................................................................................. 41 Works Cited ...................................................................................................................... 45 Appendix ........................................................................................................................... 49 Vita .................................................................................................................................... 63 vii List of Tables Table 2.1 Summary Statistics - Annual Averages ............................................................ 12 Table 2.2 Baseline Model Estimating Constant Income Elasticity ................................... 18 Table 2.3 Model Estimating Income and Scholarship Elasticity ...................................... 19 Table 2.4 Point Elasticity Estimates of Income and Scholarships based on the Fully- Specified Model ...............................................................................................................
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