The Economics of Gambling A Collection of Essays by Rhys Wheeler This thesis is submitted for the degree of Doctor of Philosophy Submitted January 2018 ã Rhys Wheeler, 2018 Declaration I declare that this thesis is my own work and has not been submitted for the award of a higher degree elsewhere. i Acknowledgements I am incredibly grateful to the many people who have supported me throughout the course of my PhD, without whom I most certainly would not have been able to complete it. Firstly, I am grateful to my supervisors Ian Walker and David Peel without whom this PhD would not have even started. I am particularly grateful to Ian who – regardless of where he is in the world – has always made himself available and willing to help with any problem and to discuss ideas with me. I must also thank Ian for accompanying me to several conferences over the course of my PhD and for introducing me to numerous researchers with whom I have had many interesting discussions and their comments have undoubtedly improved the work in this thesis. I am also grateful to members of the staff in the department who have helped my work with insightful questions and comments in seminars and annual NWDTC conferences. I consider myself incredibly lucky to have found myself working towards a PhD in such a supportive department. I am also thankful to participants of the International Conference on Gambling and Risk Taking 2016 and the Royal Economics Society Annual Conference 2017 whose comments helped shape my work. Also, I am thankful to Lisa Farrell for taking the time and effort necessary to go through this thesis and the useful comments provided. I am grateful for financial assistance from the Economic and Social Research Council, who funded my PhD, and the Gambling Commission who supported the application. I am thankful to Ben Hader and James Holdaway, both of the Gambling Commission, who helped organise several opportunities to present work there and the resulting comments helped improve the policy relevance of my work. Fellow PhD students, past and present, have provided both academic help and friendship during my PhD. I am especially grateful to Robert Pryce, Simon Spavound, Emma Gorman, Muhammad Salihu, Zhenxiong Li, and Xingzhi Yao for their friendship over the past 3 years. The laughs and the camaraderie amongst us have played an important role in my PhD experience, and it has been made all the better for it. I am also grateful to my friends outside of academia. In particular Samuel Taylor-Woods, whose favourite pastime appears to be reminding me that any work-related problems are not so bad and who has always given me a healthy perspective on whatever it is I am doing. ii Last but not least I am grateful to my family for their seemingly limitless love and support, not just during my PhD but for my entire life. I am especially grateful to my parents, Shirley and David Wheeler, who have supported me in every way imaginable. Finally, I am grateful to my grandfathers, Ronald Peacock and Michael Wheeler. Their love, support, and interest in everything I have done has been invaluable, yet they will not have chance to read this one. iii Abstract Chapter 2 examines the harm associated with being a problem gambler. Problem gambling is conventionally determined by having a score in a questionnaire screen that exceeds some critical value. The UK is fortunate in having large representative sample surveys that embed such questions, and our estimate from the 2010 survey is that several hundred thousand people in the UK could be afflicted by PG. However, existing literature has not evaluated the size of the harm associated with being a problem gambler and this chapter uses this individual level survey data to evaluate the effect of problem gambling on self-reported well-being. Together with a corresponding effect of income on well-being a money-metric of the harm associated with being a problem gambler is derived. An important methodological challenge is that well-being and the harm experienced may be simultaneously determined. Nonetheless, instrumental variable estimates suggest that problem gambling imposes an even larger reduction in well-being than least squares would suggest. The role of gambling expenditures in the transmission between problem gambling and well-being is considered, distinguishing between draw-based games, such as lotto, from scratchcards, and from other forms of gambling. Chapter 3 investigates the price elasticity of demand for the UK National Lottery – a state-licensed, draw-based lotto game. Little is known about the price elasticity of demand for gambling products because the “price” is typically hard to define. The exception is “lotto” where an economics literature has focused on the response of sales to variations in the prize distribution. Existing literature has used these responses make inferences about the price elasticity of demand, where price is defined as the cost of entry minus the expected winnings. In particular, the variation in the value of the jackpot prize pool, due to rollovers that are a feature of lotto, has been used as an instrument for price. This chapter argues that rollovers do not make valid instruments, because of their correlation with lagged sales, and propose an alternative identification strategy which exploits two arcane features of lotto. Finally, this chapter evaluates whether changes to the design of the UK National Lottery in 2013 and 2015 had a positive effect on the sales figures. Chapter 4 investigates the extent to which the large, flat-rate tax imposed on the UK National Lottery is regressive. This chapter evaluates a Working-Leser demand model for lotto tickets using both Heckman’s selection model and Cragg’s double hurdle estimator using iv household-level data. A unique strategy is employed to identify these two-stage routines by exploiting exogenous differences in consumer preference arising from religious practice. The income elasticity of lottery tickets is found to be significantly lower than previous estimates, suggesting that lottery tickets are inferior goods and that the (high) flat-rate tax imposed on lotto tickets is more regressive than previously thought. Whilst the three chapters are stand-alone essays, they are linked by the use of modern statistical techniques and the use of the best possible data. Together, they address key issues on the economics of gambling and the results are new to their respective literatures and of interest to academics and policy makers alike. v Notes This PhD has been supported by a CASE award from the Economic and Social Research Council. References are collated at the end of this thesis, rather than at the end of each chapter. All three chapters have been presented at various stages of completion at the International Conference on Gambling and Risk Taking 2016 in Las Vegas. Chapter 2 has also been presented at the Royal Economics Society Annual Conference 2017 in Bristol, the International Health Economics Association Conference 2017 in Boston, USA, and the North West Social Science Doctoral Training Partnership (NWSSDTP) Economics Conference 2017 in Manchester, UK, as well as at numerous seminars. Chapter 3 has also been presented at the North West Doctoral Training Centre (NWDTC) Economics Conference 2016 in Lancaster, UK. Comments and discussions at these conferences have helped shape the ideas and, ultimately, the chapters of this thesis. Chapter 2 has also been completed with the help of Ian Walker and Robert Pryce who are co-authors to this chapter. Chapter 3 was completed under the supervision of Ian Walker. Chapter 4 was aided by help from Robert Pryce who has expertise in using the dataset in this chapter and using religious belief as an identification strategy for demand models using micro-level data. An earlier version of Chapter 2 appears as a working paper in the Lancaster University Economics Working Paper Series as No. 2017/011. Data for Chapter 2 were collected by the National Centre for Social Research (NATCEN) on behalf of the Gambling Commission and provided to us by the UK Data Service (UKDS) at Essex University. It is readily available to other researchers at www.ukdataservice.ac.uk. Data for Chapter 3 were collected by Richard K. Lloyd and are used here with written permission. The data are readily available at his website, www.lottery.merseyworld.com. Data for Chapter 4 were collected by the Office for National Statistics (ONS) and the Department for Environment, Food and Rural Affairs (DEFRA) and provided by the UKDS. It is also readily available to other researchers via the UKDS website. The merging of annual data for Chapter 4 was done by Robert Pryce. vi Table of Contents Declaration ........................................................................................................................... i Acknowledgements .............................................................................................................. ii Abstract .............................................................................................................................. iv Notes ................................................................................................................................... vi Table of Contents .............................................................................................................. vii List of Figures .................................................................................................................... xi List of Tables ...................................................................................................................