Casinonomics

One of the primary reasons for governments legalizing casino gambling is the purported economic benefits from casino development. Among these benefits is economic growth. Over the last half-century, policies that promote economic growth have become an integral part of public sector economic activity. In the United States, state government attempts to attract industry via tax breaks and financial incentives have been the object of considerable research attention. But the apparent inability of either of these sets of policies to sustain successful outcomes over time has led state policy makers to explore alternative avenues. Writing in the 1930s, Joseph Schumpeter noted that one method of spurring economic growth is to provide a new good to the consuming public. Since legalization of a previously illegal activity is tantamount to introducing a “new good” to the public menu of consumption possibilities, there should be no surprise that a growth policy that has seen increasing popularity is legalized gambling.

The economic effects of the casino industry have been examined in a number of US states and regions, and in other countries, by a number of authors. Despite the volume of studies on the effects of gambling, there is no consensus among researchers. Indeed, the economic impacts of casinos are to some extent market specific and vary by the type of casino (e.g., destination resort, riverboat). This chapter focuses on different arguments related to the economic growth effects of casino gambling, with a specific focus on some fallacious arguments that continue to arise in the literature and in political debate. The goal of the discussion in this chapter is to set these arguments in the context of a mainstream economic perspective on exchange and economic growth.

It should be clear that there is uncertainty and disagreement in the literature regarding the economic effects of legalized gambling. While some argue that gambling cannibalizes other industries, gambling advocates disagree. Some papers in the literature analyze particular states during specific years (mostly the early 1990s) but still relatively few studies have attempted a comprehensive analysis of the economic effects of gambling in the United States or in other countries. For an overview, see Eadington (1999) and Clement (2003).

The results from the previous chapter are interesting because they capture the economic effects of casinos at a state level, right as the industry began its spread outside of Nevada and Atlantic City. However, the results do not provide any evidence on whether the economic growth effects persist beyond a few years. In this chapter I provide additional empirical evidence on the impact of casinos on state-level economic growth. First, I repeat the casino analysis from the previous chapter, using updated data. Then I present an analysis of how the casino industry impacted the recovery from Hurricane Katrina in 2005 in the Gulf States. This newer evidence is consistent with the previous evidence we found.

A primary reason for legalizing gambling—especially recently in the cases of lotteries and casinos—is to provide alternative revenue sources to those which states typically employ. Arguably, the intended effect of these new revenue sources is to increase state revenues and reduce fiscal pressure. Oddly, few researchers have attempted to analyze whether this intended effect has, in fact, been realized. This neglect raises the important empirical question: What is the relationship actually observed between legalized gambling and state government revenues? This is a critical question, especially as many states struggle to deal with increasingly serious fiscal shortfalls. The issue also has significant international importance, as casinos spread worldwide.

This first part of the book comprises three chapters (2–4) that provide a basic theoretical discussion of the relationship between casino gambling and economic growth. The remaining chapters review the empirical literature and provide empirical analyses of various casino impacts. As a group, these chapters provide a fairly comprehensive examination of the potential economic benefits of casinos.

Although there are certainly economic benefits of casinos in many jurisdictions, the growth of the industry is not without controversy. Casino opponents argue that casinos bring a variety of social problems, including increases in crime, bankruptcy, and divorce. Recently claims of casinos leading to higher drunk driving prevalence have also been noted. For example, newspaper reports often link DUI arrests and/or alcohol-related traffic fatalities to casinos that serve alcohol (e.g., Cornfield 2009; Smith 2010). Many casinos follow a “destination resort” model; they include restaurants, bars, shows, shops, and a hotel. Other casinos cater more to a local clientele. At a minimum, both types of casino typically include a bar service and casino customers often enjoy drinking alcohol while they socialize and play casino games. The fact that alcohol is readily available at many casinos suggests that casinos may, in fact, be a catalyst for increased drunk driving and hence, increased alcohol-related traffic fatalities. However, a more detailed look at the possible impact of casinos on drunken driving behavior demonstrates that there could be an inverse relationship between casinos and drunk driving under the right circumstances. Regardless, we are aware of no previous study that rigorously examines the possibility of such a link.

We continue the analysis of the Add Health data used in Chap. 10 to examine the relationship between gambling behaviors and attention deficit hyperactivity disorder (ADHD). ADHD is a neurobehavioral condition, affecting 3–10 % of youth and persisting into adulthood in 30–50 % of cases (Richters et al. 1995; Smalley et al. 2003). ADHD accounts for a third to a half of all referrals to child mental health services and is characterized by developmentally inappropriate behaviors, low frustration tolerance, impulsivity, poor organization, distractibility, and a lack of concentration (Richters et al. 1995).

In the previous three chapters, we have examined some problem behaviors that are often associated with casino gambling. Overall, the empirical analyses in these chapters suggest that individuals who engage in gambling are more likely than non-gamblers to engage in the other risky behaviors studied.

Perhaps the most controversial issue surrounding the casino legalization debate is the “social costs” that accompany gambling. The casino industry maintains that its product is simply a form of entertainment like going to movies and football games, and consumers are willing to pay a price for entertainment. But many researchers argue that gambling is fundamentally different from other forms of entertainment because gambling, unlike movies and football games, can lead to addiction. As noted in Chap. 10, the prevalence rate of disordered gambling has been estimated to be between 0.4 and 2.0 % of the general population.

In the previous chapter, I explained a mainstream economics definition of “social cost” and how it could be applied in cost–benefit analyses of gambling. Throughout the chapter, potential pitfalls of cost–benefit analyses are indicated by way of specific examples from previous studies. Cost–benefit analyses have garnered a significant amount of attention from media, industry, government, and researchers. Yet, aside from the fundamental problem of defining social cost, performing such studies in any meaningful and useful way is surprisingly difficult to do. In this chapter, we examine different issues that complicate social cost analysis. This chapter complements the previous one, as it raises some new issues or emphasizes issues only mentioned in Chap. 13.

Among the criticisms of gambling and the casino industry is the claim that gambling is a waste of time, or worse a “directly unproductive profit-seeking” (DUP) activity. Clearly, gambling is a form of entertainment, like golf, tennis, snow skiing, or watching television and movies. Some gamblers may develop a gambling problem, and we should be concerned with that. But it is inappropriate to classify gambling by professionals, for example, as a wasteful activity.

One part of the analysis in Chap. 10 focused on gambling behavior and criminal behavior among adolescents. The findings were that individuals who are more likely to gamble are also more likely to engage in criminal activity. However, the results showed that the type of gambling was important; this effect did not occur among lottery or casino gamblers; rather, it was individuals who engage in other types of gambling who were significantly more likely to engage in crime. These results confirm that there is a link between gambling behavior and criminal behavior. But there is no indication from our evidence that casino players engage in crime any more than other individuals do. Of course, our sample was limited to adolescents, so there may still be a general link between casino gambling and crime.

As discussed in Chap. 4, casino industry observers, especially critics, have argued that the casino industry “cannibalizes” other industries or acts as a substitute to other industries. Although this is true of any new firm or industry, to an extent, this criticism of casinos has been particularly influential in political and public debate. Yet, there have been few empirical analyses of this issue. There is no paper of which I am aware that has addressed whether casinos cause a substitution effect with other businesses at the local level. In this chapter we examine the substitution effect of casinos with other businesses using data from Detroit, Michigan.

In Part I of the book we examined the theoretical ways in which casinos could generate economic growth. We also found empirical evidence that suggests casinos do, in fact, have a positive growth effect at the state level. Also in Part I, however, we examined some of the criticisms of casinos. One key argument is that casinos expand at the expense of other industries. This is the so-called “substitution effect.” In Chap. 17 we addressed this issue with respect to non-gambling industries. However, the analysis covered only one market (Detroit) and only for commercial real estate values. There have been several other studies in the literature to examine the impact of casinos on property values, as cited in Chap. 17.

In the chapters in this part of the book we have focused on some of the social cost issues related to casinos. In Chaps. 13 and 14, we present the economic perspective on social costs. Importantly, many social cost studies do not define what they mean by “social cost.” This has led to a wide variety of social cost estimates in the literature. Most of these likely overestimate the true social costs of gambling. Because of the inherent problems in defining and measuring social costs, it may be beneficial for researchers to stop trying to estimate a monetary value for costs, and instead identify the types of problems that disordered gamblers experience. Psychologists have been working on this issue for several decades.

In this concluding chapter I have two purposes. First, I wish to give a brief overview of the development of the “economics of gambling” research field. Second, I discuss important new areas of research and explain the direction in which I expect gambling research to move in the near future.