October 09, 2006
Ripple Effect of Banning Online Gambling: Information Markets
Posted by Christine Hurt

An op-ed in today's NYT laments the end-of-September end-run that Congress did that attached provisions from H.R. 4411 to the SAFE Ports Act.  Once the Act is signed by the President, the provisions will prohibit U.S. financial institutions from facilitating transactions between U.S. consumers and online gambling sites.  The authors of the op-ed, Robert Hahn and Paul Tetlock, criticize prohibiting online gambling because of its effect on information markets.

For example, Tradesports, which is hosted offshore, would arguably come under the auspices of these new provisions, making the host bank of your credit card a criminal for processing your participation in the site.  (Note that the Iowa Electronic Markets operates under a no-action letter.)  The authors argue that some types of wagers have significant positive utility while others do not.  In the authors' view, information sent into the marketplace by these types of sites have a greater utility than the consumption value of online gambling sites. 

I don't disagree, and have even presented a taxonomy of wagering activity based in part on the utility of the wager in this article.  However, the U.S. government seems to measure the utility of a wagering activity based on how much pressure an appropriate lobby will exert to exempt its activities.  And, of course, how much pressure will be exerted will depend on the amount of profits available to whom as a result of the wagering activity.  So, if you are the NFL, you will expend great amounts to ensure that fantasy football is exempted from any prohibition.  State lotteries will do likewise.  These activities will be exempted even though the social utility of these activities may be less than the utility of information markets.  These markets need better lobbyists!

However, I would also posit that the U.S. government is not going to turn its scarce resources to information markets just yet. If these sites grow large enough to cannibalize profits from state lotteries, then we'll have a problem.

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