Ongoing Challenges in Cost-Benefit Analysis of Casino Gambling

Ongoing Challenges in Cost-Benefit Analysis of

Casino GamblingColloquium on the European and National Perspectives of

the Regulation of GamblingTilburg University, The Netherlands

23 November 2006

Douglas M. Walker, Ph.D.

Walker, Tilburg Colloquium 2

Gambling research in the U.S. Since casino gambling began expanding

outside Nevada and New Jersey in the early 1990s, gambling research has increased.

Politicians are interested in benefits relative to costs of legalization.• Casino legalization is a state-level policy.• State governments have been facing record-

level budget deficits. Gambling research has been influential, as

it is commonly referred to by politicians and the media.


The economics of gambling literature

Some well-known studies include…• U.S. House of Representatives (hearing, 1994), • National Gambling Impact Study Commission

(NGISC 1999)• Australian Productivity Commission (APC 1999)• National Opinion Research Center (NORC 1999)• National Research Council’s Pathological

Gambling: A Critical Review (1999)


Earlier studies: these are mostly not peer-reviewed, and use arbitrary assumptions.• Politzer et al. (1985)• Maryland Task Force (1990)• “Casinos in Florida” (1995)• Goodman (1994a, 1995b)• Grinols and Omorov (1996), Grinols (1994a,

1995a)• Kindt (1994, 1995)• Thompson, Gazel, and Rickman (1996, 1997,

1999)

Gambling literature, cont.


More recent studies, but still flawed: • Thompson and Quinn (2000)• Managerial and Decision Economics

(2001), edited by Grinols and Mustard Grinols and Mustard Gazel, Rickman, and Thompson Kindt

• Comments on Kindt’s paper published, MDE 2004• Grinols (2004)

perhaps most influential



• Thompson and Schwer (2003/2005) Study of Las Vegas that got publicity Methodology by Thompson et al. (1996)

• Hall Aitken (2006) Study of U.K.

• PolicyAnalytics (2006) Study of Indiana, with a focus on crime Relies on Grinols (2004)

• Grinols and Mustard (2006) Review of Economics and Statistics study on crime



Gambling literature, cont. Research in this area has been criticized

by… • National Research Council (1999)• Walker and Barnett (1999• Shaffer et al. (2001)• Federal Reserve Bank of Minneapolis (2003)• Eadington (2004)• Walker (2007)• …and elsewhere


Economic perspective Economic perspective on costs-

benefits• Represented by Collins and Lapsley

(2003), Eadington (2003), and Walker and Barnett (1999).

This perspective has a foundation in the economics literature.• Detailed description in Walker (2007)


Economic perspective on benefits The benefits of legalized casino gambling

include…• Tax revenues (transfers, but easy to avoid)• Employment and wage effects• Capital and labor inflow to a region• Potential economic growth

Walker and Jackson (1998, 2007)• Consumer benefits (CS, variety benefits,

competitive pressure on entertainment) This is the most commonly ignored benefit.

• Consumer sovereignty Some may argue that increased freedom of choice is,

itself a benefit.


There have been relatively few academic studies of the benefits of gambling.• However, these are arguably easier to measure

than the costs.• Politicians may care mostly about tax

revenues, and so do not demand detailed studies of benefits.

The most important benefits (CS, other consumer benefits) are most difficult to measure.

Benefits, cont.


There is debate over all aspects of the costs of gambling• definition• measurement

Social cost is a “decrease in aggregate societal wealth” (Walker and Barnett, 1999).• Wealth need not be in monetary terms; it is utility.• Transfers of wealth are not social costs.• Private (internalized) costs are omitted.

Most researchers agree that the costs are caused by pathological gamblers.• There are different severities of the affliction, ignored

here Compulsive, pathological, problem gamblers, etc.

Economic perspective on costs


Costs, cont.

Even if the definition is conceptually valid, measurement is difficult, if not impossible.

There is no agreement among researchers from different disciplines.• Other social scientists do not like the

exclusion of transfers and other private costs.


Why the focus on costs? Costs are typically the focus by media,

politicians, and researchers.• This may be a result of the existing illegal

status of casinos: “Are the benefits of legalization/expansion worth

the costs?”• Estimates of expected tax revenues, employment

increases, and changes in average wages can be easily produced.

• The social/economic costs are more elusive, both in defining them and in measuring them.

Costs are closely related to prevalence of pathological gambling.


Calculating social costs Most of cost studies use this

formula: estimated annual cost per

pathological gambler X prevalence estimate (%) X population estimate = estimated annual social cost of gambling


Variation in cost estimates Authors rarely define “social cost”

before estimating it. Studies use ad hoc methodologies,

resulting in cost estimates ranging from US$9,000-50,000 (€7.000-39.000) per pathological gambler per year.

Such a large range indicates that the methodologies are not the same.


Examples of problematic studies, discussed hereafter

Grinols (2004) Politzer et al. (1985) Thompson et al. (1996, 1997, 1999) Thompson and Quinn (2000) Thompson and Schwer (2003) Grinols and Mustard (2006)


Grinols (2004) Gambling in America demonstrates

many of the problems in the literature.• His discussion appears to be

comprehensive and unbiased, but it is neither.

He ignores work with which he disagrees.• See Eadington (2004) for a discussion.

He overstates the costs and discounts the potential benefits from gambling.


Grinols (2004), cont. Grinols estimates for the U.S.:

• Annual cost to society of one pathological gambler: $10,330.

• Annual cost per problem gambler: $2,945.

• On a “per adult” basis, the average cost is estimated to be $219. (p. 175)

After some analysis, it is clear that these estimates are meaningless.


Grinols (2004), cont. Cost estimates were “derived by

averaging over the available [“original”] studies for each category of social cost, adjusting to 2003 dollars, and summing over cost types” (p. 176).

The studies used by Grinols to derive his cost estimates include…• 9 studies, none peer-reviewed.


Grinols (2004), cont. Grinols’ estimate is based (in part)

on… Politzer et al. (1981) Thompson et al. (1996) Thompson and Quinn (1999/2000) Thompson and Schwer (2003)

These studies have been criticized by a number of researchers.


Grinols (2004), cont.

• Grinols ignores the controversy over how to define and estimate social costs.

His presentation gives the impression that because the cited research is “original” it is legitimate.

He does not explain differences in the studies or their potential flaws.

• Let’s look at some aspects of the studies used by Grinols…


Politzer et al. (1985) Define “abused dollars”:

[the] amount [of money] obtained legally and/or illegally by the pathological gambler which otherwise would have been used by the pathological gambler, his family, or his victims for other essential purposes. These abused dollars include earned income put at risk in gambling, borrowed, and/or illegally obtained dollars spent on basic needs and/or provided to the family which otherwise would have been “covered” by that fraction of earned income which was used for gambling, and borrowed and/or illegally obtained dollars for the partial payment of gambling related debts.

This concept is vague.• What is an “essential

purpose”? Is it defined the

same for Bill Gates and Joe Sikzpak?

• Could be interpreted as the total bets placed (handle), much larger than actual losses.

• Any money borrowed to gambler is considered “abused dollars.”

Use of this concept allows one to arrive at a very high social cost estimate.


Thompson et al. (1997) Estimated social cost per compulsive

gambler is $9,469 (p. 87), but…• They do not define “social cost,” and

include whatever negative effects they can measure with their survey on Gamblers Anonymous (GA) members.

Using GA members in Las Vegas to is not a random sample of problem gamblers.

Most of the “costs” are transfers.


Thompson et al. (1997), cont. Costs included…

• Employment (lost work hours, unemployment compensation, lost productivity), $2941

(Lost hours, productivity are internalized; unemployment compensation is a transfer or “fiscal externality.”)

• Bad debts, $1487 (Transfer of wealth)

• Civil court costs (bankruptcy, other), $848• Criminal justice (theft, arrests, trials, probation, incarceration),

$3498 (Thefts are transfers)

• Therapy, $361 • Welfare, $334 (Transfer of wealth)

TOTAL: $9469• (Revised to $2974 after eliminating transfers and internalized

costs. [Walker and Barnett 1999])


Thompson and Quinn (2000) Costs include money leaving South

Carolina for purchase of video poker machines ($46.5 million each year).• Then any purchase represents a social

cost? Money leaving the state is not a cost since

the buyer values what is bought more than the money spent.

A transaction at the grocery store is similar.


Thompson and Schwer (2003) They estimate the annual social cost of per

pathological gambler in Las Vegas at $19,085.• Accounting for estimated prevalence and

population, the total annual cost estimate is between $301 and 470 million.

Their cost figure is the result of numerous arbitrary assumptions.• We’ll examine a component of this estimate

later…


Studies cited by Grinols (2004) Among the studies cited by Grinols,

there is…• Disagreement about the types of costs

to include Sometimes costs are excluded because of

measurement difficulties.• Disagreements on the estimated values

of the individual cost categories The estimated values are often the result of

arbitrary assumptions (see Walker 2003)


Adjudication costs (criminal and civil justice)

The monetary estimates for these costs among the Grinols-cited studies are:• $3,619 (Maryland, Politzer et al. 1981)• $733 (Wisconsin, Thompson et al. 1996)• $568 (Conn., Thompson et al. 1998)• $31 (S. Dakota, 1999)• $420 (Louisiana, Ryan et al. 1999)• $266 (S. Carolina, Thompson and Quinn 2000)• $51 (Nevada, Thompson and Schwer 2003)

Such a huge variation across states indicates these studies are not measuring the same thing the same way.


Thompson and Schwer (2003) cost estimate for “lost work time”

50 of 89 (or 56%) of Gamblers Anonymous survey respondents indicated they had missed work because of gambling.• An average of 17.22 hours missed during each month due

to gambling.• The average loss is 9.67 hours/month allocated over the 89

respondents. This amounts to 116.1 hours per year, calculated

[(50 x 17.22)/89] x 12• 116.1 hours is multiplied by $15/hr, the hourly rate based

on Thompson et al.’s (1996) use of an average annual pay rate of $23,610.

This annual rate of $23,610 is based on the U.S. average salary (Thompson et al. 1996, p. 17).

This results in an estimated cost of $1,742 for lost work time.


Grinols and Mustard (2006) This recent paper in Review of Economics

and Statistics has numerous problems• In calculating crime rates, they include crimes

committed by visitors, but omit visitors from the measure of population at risk.

• Their estimate of costs of crime seems arbitrary.

• Other issues are discussed in Walker (2007)


General Problems in Estimating Social Costs of Gambling

Regardless of the definition of “social costs” chosen, there are measurement problems…• Counterfactual scenario• Comorbidity• Survey data and fungible budgets• Government expenditures

If a particular study does not address these, it should probably be ignored.


Counterfactual scenario For policy purposes, the economic

and social effects of legalized casinos must be compared to the case in which casinos are not legal.• This may be difficult to know in terms of

employment, economic growth, etc. Unless the counterfactual is what is already

happening… In some stagnant economies, one could

argue that no other industry would have come (e.g., Mississippi Gulf Coast).


Counterfactual scenario, cont. In terms of problem/pathological

gambling…• If casinos were not legal in the state, would

people just go to other venues?• If casinos were not available, would the

pathological gamblers with coexisting disorders have more serious alcohol or drug problems?

If yes, then it is possible that the gambling legalization would lead to lower social costs even if more people would become pathological gamblers.


Comorbidity This may be the biggest problem in cost-benefit analysis. Studies have found that many pathological gamblers have

other disorders.• Petry, Stinson, and Grant (2005, p. 569) find:

74.2% have alcohol use disorders 38.1% have drug use disorders 41.3% have anxiety disorders 28.5% have obsessive-compulsive personality disorder

How do you allocate the “social costs” to the different problems when many pathological gamblers have other disorders?

Most of the published studies ignore this, resulting in overestimates of the social costs attributable to gambling.


Surveys and fungible budgets Diagnostic instruments and cost estimate surveys

ask various questions about potential problem gamblers’ behavior.

Blaszczynski et al. (2006) explain that without explicit instructions, respondents use different strategies in estimating their gambling losses.• The result may be serious biases in gambling losses

reported in the literature (p. 128). Walker (2007) discusses the inability to attribute

specific expenditures to specific revenue sources.• Budgets are fungible.


DSM-IV and SOGS criteria DSM-IV items

• 8. “…has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling.”

If a person cannot estimate gambling losses, can they correctly attribute their crimes to its cause?

• 10. “…relies on others to provide money to relieve a desperate financial situation caused by gambling.”

What if the person bought an expensive car, or is otherwise financially irresponsible?

• How do clinicians deal with this possibility?


DSM-IV and SOGS criteria, cont.

SOGS items• 14. “Have you ever borrowed from someone

and not paid them back as a result of your gambling?”

What if you dine out at fine restaurants too often? Will you attribute your financial problems to the proper cause?

• 16a-k. “If you borrowed money to gamble or pay gambling debts, who or where did you borrow from?” (many possible responses)

How can a person attribute specific spending to specific sources of income, unless there is only one source of income?


Caveat Clinicians may argue that it does not

matter whether it is possible to identify sources of spending. The screening instruments may serve their purpose anyway.

Perhaps what matters is if the person thinks he/she has a problem.


Relevance of diagnostic tools to cost estimates

The reason these types of questions are relevant to policy is that the questions about total losses and sources of money used to gamble are used in cost estimation studies.• Abused dollars• Bad debts• Bailout costs• Bankruptcy costs


“Fiscal externalities” Browning (1999) discusses how to

handle costs of government policies.• His application is to health care costs

associated with smoking. Walker (2007) discusses this in the

context of treatment of pathological gambling.


“Fiscal externalities” (cont.) The issue is how to classify costs of

government for pathological gambling behavior.• Is the monetary cost incurred by government a

cost of pathological gambling, or a cost of our philosophy on government and policy?

• Suppose one country has very generous treatment reimbursement (150%), while another country’s government pays only 50% of the costs.

The “social cost” of the first country would be triple that of the second.


“Fiscal externalities”, cont. If government expenditures are

“social costs,” then we can eliminate costs by eliminating spending.

Obviously this isn’t the correct way to think about social costs.


Critiques of C-B Analyses Reuter (1999) and Kleiman (1999) are

enlightening.• They argue that research effort would be better

spent on the effects of policy changes. Applied to gambling, since gambling is already

widely available, what can we do to minimize the costs/harms?

• This is similar to what public health perspectives advocate – harm minimization.


Should we measure costs and benefits of casinos?

There are motivations for this type of research…• Politicians need data to inform and defend their

decisions.• “Policy entrepreneurs” want to influence policy

(Krugman 1996)• Researchers benefit if there is a problem to investigate.

But do cost-benefit studies provide good information? And are they important?• Policymakers might make better decisions without such

studies.


Should we measure costs and benefits of casinos? (cont.)

Peter Collins’ book, Gambling and the public interest (2003) has an excellent discussion on this issue.

Policy discussions in the U.S. neglect the fundamental issues…• Property rights• Freedom of choice/consumer sovereignty• The role of government in a free society

We instead focus on expected tax benefits compared to a murky understanding of “social costs.”


Conclusions Unfortunately, researchers have not developed

valid or practical methods for estimating costs (and benefits) of casino gambling.

Given that some researchers seem intent on influencing policy, as explained by Eadington (2004), perhaps we should focus more on the more basic issues of property rights, freedom of choice, and the proper role of government.

At this stage in the development of research in this area, policymakers are advised not to put too much stock in existing studies.• If one does rely on such studies, seek an external

critique of the study to be aware of potential problems that may not be explicitly identified in the study.


Contact information

The Economics of Casino Gambling

by Doug Walker

Springer (Jan. 2007)ISBN 3-540-35102-7

Doug WalkerAssociate Professor of

EconomicsGeorgia College, CBX 14Milledgeville, GA 31061USA

[email protected]://walker-research.gcsu.edu(This link has presentation slides and

references from the presentation.)

Ongoing Challenges in Cost-Benefit Analysis of Casino Gambling

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