The Economics of a Lottery


A lottery is a game in which the participants are given a chance to win money or other valuable goods. Lotteries are commonly organized by state governments and commercial enterprises. The winning prize may be a cash sum, a fixed number of products or services, or a series of goods or services with a predetermined value. The purchase of a ticket enables the purchaser to experience a thrill and indulge in a fantasy of becoming wealthy. The purchase of a ticket cannot be accounted for by decision models based on expected value maximization, as the purchase is often made to obtain a sensation or an illusion of wealth rather than to achieve a particular outcome. However, lottery purchases can be accounted for by more general models that are based on utility functions defined on things other than the lottery outcomes.

The casting of lots to decide fates and to distribute property has a long record in human history, dating back to the Old Testament and even earlier. Public lotteries to distribute prizes in exchange for a small wager are of more recent origin, but they also have considerable antiquity.

Lottery revenues are not just a source of revenue for states, but can be used to finance public projects. In early colonial America, for example, lotteries were used to fund paving streets and wharves, building churches, constructing canals, and establishing colleges such as Harvard and Yale.

The development of a state lottery begins with a piecemeal approach to policy, and it is dominated by the need for a steady stream of revenues. The result is that the underlying economics of a lottery are overlooked. A lottery grows and expands, usually in response to pressure from convenience stores (who are the primary vendors for tickets) and suppliers of lottery equipment; teachers (as lottery revenues are often earmarked for education); and state legislators (who become accustomed to the extra income). As a result, lottery patrons tend to come from middle-income neighborhoods and far less proportionally from low-income ones.