Estimating the Demand for Lottery Gambling The Influence of Functional Form and the Definition of Effective Price

This study examines the role of functional form and the definition of effective price in the estimation of the demand elasticity for Lotto Texas. Using a nonparametric local mean function analysis, we find that the demand restriction imbedded in a semilog specification with effective price defined a...

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Bibliographic Details
Published inPublic finance review Vol. 43; no. 6; pp. 691 - 716
Main Authors Dunn, Richard A., Trousdale, Michael A.
Format Journal Article
LanguageEnglish
Published Los Angeles, CA SAGE Publications 01.11.2015
SAGE PUBLICATIONS, INC
Subjects
Elasticity of demand
Estimation
Gambling
Lotteries
Prices
Regression analysis
Revenue
Sales
Studies
United States > US
Texas
gambling
consumer demand
lottery
elasticity
effective price
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Summary:This study examines the role of functional form and the definition of effective price in the estimation of the demand elasticity for Lotto Texas. Using a nonparametric local mean function analysis, we find that the demand restriction imbedded in a semilog specification with effective price defined as net expected revenue per ticket best matches the observed data. In contrast, the restriction of a constant elasticity of sales with respect to net expected revenue—implicitly assumed by the log-linear specification typically adopted in this literature—is strongly rejected. Further, we find that omission of drawings with negative net expected revenue can meaningfully influence coefficient estimation. Our regression analysis finds that the effect of omitting such drawings is an order of magnitude times greater than that of failing to account for the endogeneity of effective price.
ISSN:1091-1421
1552-7530
DOI:10.1177/1091142114543738