Working Paper: NBER ID: w28975
Authors: Benjamin Lockwood; Hunt Allcott; Dmitry Taubinsky; Afras Y. Sial
Abstract: We use natural experiments embedded in state-run lotteries and a new nationally representative survey to provide reduced-form and structural estimates of risk preferences and behavioral biases in lottery demand. We find that sales respond more to the expected value of the jackpot than to price, but are unresponsive to variation in the second prize—a pattern that implies probability weighting but is inconsistent with standard parameterizations. In the survey, we find that lottery spending decreases modestly with income and is strongly associated with measures of innumeracy, poor statistical reasoning, and other proxies for behavioral bias. These bias proxies decline with income and statistically account for 43 percent of lottery purchases, suggesting that at least some of lottery demand is due to behavioral bias, not just anticipatory utility or entertainment value. We use these empirical moments to estimate a model of socially optimal lottery design. In the model, current multi-state lottery designs increase welfare but may harm heavy spenders.
Keywords: lottery demand; behavioral biases; welfare implications; risk preferences
JEL Codes: D12; D61; D9; H21; H42; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income (E25) | lottery spending (H27) |
| innumeracy and behavioral biases (G41) | lottery spending (H27) |
| jackpot decision weights (D79) | objective probability of winning (C25) |
| ticket prices (D49) | lottery demand (H27) |
| jackpot expected value (H27) | lottery demand (H27) |