Funding Public Goods with Lotteries: Experimental Evidence

Abstract

Why do individuals participate in charitable gambling and state-run lotteries? In contrast to previous explanations that rely on risk-preference or pure love of gambling motives, we present a model where risk-neutral expected utility maximizers explicitly recognize that lotteries are being used to finance public goods. The model predicts that: a) individuals have an incentive to purchase lottery tickets; b) such a lottery will generate greater public good provision than would be attained from voluntary contributions; c) net of the cost of prizes, public goods provision is increasing in prize amounts; and d) lotteries cannot be used to finance socially undesirable public goods. We then investigate the efficacy of the lottery mechanism in laboratory public good environments. The first experiment we report involves a sharp test of the prediction that lotteries will out-perform voluntary contributions. In our voluntary contribution treatment, subjects’ contributions to public goods average around 25-30% of endowments (compared with a dominant strategy prediction of zero contributions). In our lottery treatment we introduce a lottery into this environment and find average contributions to be well predicted by the Nash equilibrium. After accounting for the cost of awarding prizes in the lottery, we find that the lottery mechanism increases public good provision, as predicted. We investigate the robustness of this result in a second public good experiment. Again, we find that the introduction of lotteries does indeed alleviate free-riding. We also find, as predicted, that ticket purchases vary with the size of the fixed prize and with the return from the public good: lotteries with large prizes are more effective, and ticket purchases drop dramatically when the public good is not valued by subjects.