As my colleague Larry Ribstein has already pointed out, the state of Illinois is considering selling its state lottery for a one-time lump sum. The folks at one of the other law schools here in Illinois also are talking about it. As Larry points out, there are some obvious problems with putting up to $10 billion in the hands of a single Illinois governor, but there are some other problems, too, that go beyond the short-term profits to be gained from selling off public revenue-generating assets. As a point of reference, lotteries have over U.S. history been both completely prohibited and freely permitted; the current state of affairs is that state may vote to legalize lotteries, and all such states use the state-owned monopoly model. Private lotteries would represent a change in the legal landscape; currently private parties may not start their own lotteries.
As readers know, I write and think a lot about different types of gambling. Although occasional readers probably think that I have a purely libertarian view of gambling regulation, I think my position is more nuanced. I argue for reasoned and consistent regulation (or nonregulation)of similar speculation activities based on the net utility of such activity. So, I would could be for either complete prohibition or permission, or a hybrid approach that treats like activities similarly. If I were to begin prohibiting activities along a utility spectrum, the first thing I would prohibit would be the lottery. As a negative-sum game, it creates no net positive utility but also may create negative utility through externalities. Melissa Kearney, who is quoted in the NYT article, has studied the externalities of lotteries, including crime, bankruptcies, and domestic problems. However, states may argue that if the profits of the lottery are 100X, and the costs of treating the additional problems as 50X, then the state still comes out ahead. However, does this calculus still work in a world in which the 100X goes to the private owners of the lottery and not the state, which must pay for the additional social services costs?
The fix would be to tax the privately-owned lottery at a 50% rate. The NYT article didn't say anything about the tax rate of the lottery, although many states tax commercial and tribal casinos at a higher rate. Is this tax pre-paid somehow in the lump sum payment for the lottery? I am not cheered by that thought; I would prefer that my state government get paid as it goes.
I also think it will be interesting to see a private-run lottery. As it is, many states aggressively advertise their lottery. Here in Illinois, lottery card vending machines are in the grocery stores, which makes one wonder about the effectiveness of age requirements for lottery participation. The machines are next to the Coinstar and candy vending machines, so my son always wants to "play that game." Nice. The NYT article suggests that advertising will be more aggressive. Also note that one exception to the anti-gambling provisions in the SAFE Port Act is online wagering in "intrastate transactions" authorized by the law of such state. I would bet serious money that a private Illinois lottery would have an online game up and running fairly quickly.
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8345157d569e200d83511cf7169e2
Links to weblogs that reference The Illinois Lottery on the Auction Block:
1. Posted by Scott Moss on January 24, 2007 @ 20:34 | Permalink
I also doubt the price the state will get for the lottery will equal the discounted present value of the lottery's income stream. Companies bidding for the lottery, in assessing the discounted value of the lottery's income stream, will apply an additional discount (beyond the standard future-income discounting): they'll discount for the risk that the state might, in the future, diminish some of their future income stream with intrusive measures like banning advertising or Christine's 50% tax rate. If I'm right about this, then the state is financially better off keeping the lottery's income stream rather than selling it off for a lump-sum that'll be discounted below the present value of that income stream.
2. Posted by Eric Goldman on January 24, 2007 @ 23:11 | Permalink
This just sounds like a moral hazard train wreck in the making. But maybe we'll get lucky and the lottery buyer will be a public company, which will allow individual investors to buy the stock rather than play the lotto. Eric.
3. Posted by D. Daniel Sokol on January 25, 2007 @ 7:52 | Permalink
I fear that this is a disaster in the making and smacks of public choice concerns on the current legislators who want to win reelection without having to raise taxes in one form or another.
My general recommendations:
1. Use an auction. An auction should yield more profitable results. A well designed auction should attract bidders and prevent collusion.
2. Have a well functioning regulatory structure to provide oversight. Given that this is a monopoly, this is a particular problem.
3. Do not make it a one time concession. Have the lottery go up for a new concession every 5 or 10 years. This helps to ensure that there is performance accountability.
| Sun | Mon | Tue | Wed | Thu | Fri | Sat |
|---|---|---|---|---|---|---|
| 1 | 2 | 3 | 4 | |||
| 5 | 6 | 7 | 8 | 9 | 10 | 11 |
| 12 | 13 | 14 | 15 | 16 | 17 | 18 |
| 19 | 20 | 21 | 22 | 23 | 24 | 25 |
| 26 | 27 | 28 | 29 |
