An Inquiry into the Economics of Race-Track Gambling

Abstract

In the face of mounting fiscal pressures state governments are looking increasingly to gambling as a source of revenue. If the sale of gambling is to provide revenues, however, it is important to understand the demand for this good in order to adopt the appropriate pricing mechanism. Standard economic theory posits a model where the quantity of a good consumed is negatively related to the price of the good if we fix tastes, income, and the prices of other goods. Such a concept is intuitively reasonable as well as useful in analyzing much of observed economic behavior. Does gambling have a price in this sense, and do consumers behave in the same rational framework so that this good fits the model? In this paper I will examine the demand for horse-race wagering. Part I will present a model which attempts to systematically explain and predict the behavior of consumers who bet on horses. In Part II a demand equation for wagering will be estimated. From this the optimum price or rate of taxation can be derived so as to maximize the revenue received by both the state and the track.