Working Paper: NBER ID: w23969
Authors: Juinjen Chang; Chingchong Lai; Ping Wang
Abstract: We develop a framework to study analytically and quantitatively relentless cross-border casino competition with social-disorder and income-creation externalities. Two bordering casinos compete with each other for the external source of demand of recreational and problem gamblers from the neighboring city and the two city governments set their optimal casino revenue tax and gambler tax surcharge to maximize social welfare. We show that cross-border casino gambling makes aggregate casino demand more elastic despite the addictive nature of gambling. While a lower commuting cost favors a cross-border casino in a city with a weaker taste for gambling, the positive scale effect of its own population may be offset by a negative effect on cross-border gambling. By calibrating the model to fit the Detroit-Windsor market, we find that cross-border competition induces both cities to lower casino taxes to below their pre-existing rates, while the optimal tax mix features a shift from the tax surcharge to the casino revenue tax. Our counterfactual analysis suggests that lowering the commuting cost to the pre-911 level need not have favored Windsor, whereas increasing Detroit's population to the 2000 level would have only given Windsor a modest welfare gain.
Keywords: crossborder casino competition; social disorder; income creation externalities; optimal tax policy
JEL Codes: D21; D62; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| commuting costs (R48) | crossborder gambling intensity (L83) |
| population size of rival city (R12) | local city's price elasticity of casino demand (R22) |
| local city's price elasticity of casino demand (R22) | local casino prices (L83) |
| crossborder gambling (L83) | aggregate demand elasticity for casinos (E20) |
| crossborder gambling (L83) | optimal tax policy (H21) |
| commuting costs (pre-9/11 levels) (R48) | favor Windsor (Y70) |
| increasing Detroit’s population to 2000 levels (R23) | welfare gains for Windsor (D69) |