Do Lottery Operators Exploit Their Lottery Power? Efficiency and Equality Considerations in Optimal Lottery Design

Abstract

We study the problem facing the operator of a lottery who is charged with raising revenue for the public finances. Demand for the lottery is a function of both disposable income and the pricing of the game. Departing from the current literature, we show that optimal lottery pricing includes corrections for the degree of inequality and skewness in the income distribution and features of the function relating lottery spend to disposable income. When gross lottery expenditure is regressive, it is optimal for the operator to improve the terms of the game by being more generous with the proportion of spend that is returned to players. The opposite result holds when gross lottery expenditure is progressive. Using results from analysis of the U.K. National Lottery’s Saturday game between 1997 and 2013, we show that the effective price was about ten percentage points too low to be efficient, so that the operator was not fully exploiting its lottery power. However, we also show that, were it to have raised its price to improve efficiency, it would have increased inequality.