Essays on State Lottery Demand and Revenue Earmarks

Since the first modern state-sponsored lottery was instituted in New Hampshire in 1964, lotteries have proliferated to 42 states and the District of Colombia. With little exception, research has shown that these lotteries are a highly regressive form of taxation. However, this body of research does not take into account a theoretical finding that the manner in which collected funds are earmarked impacts participation patterns. The goal of this dissertation is to test this finding empirically.

In the first analysis, I use sales data from the Tennessee Education Lottery and scholarship data from the TEL Scholarship program to test this theory directly. I find that instant game sales are increasing in the number of scholarships awarded in a given county and that the implicit tax incidence is less regressive than in certain other states. Theory does not hold for Powerball sales. This may be due to a misconception that buying into a multi-state game does not directly subsidize programs in Tennessee.

In the second analysis, I focus on the Texas Lottery, which began as a revenue stream for the state’s General Fund, but eventually became a dedicated revenue stream for K-12 education. I exploit this change to test for a structural break in the demand for two lottery games. Then, I extend an existing theory of lottery demand to take this structural break into account. I find that there is a structural break at the time the earmark is implemented, and that the lottery is less regressive after the earmark.