Overview of the Social Costs of Gambling

ECON 360, Economics of GamblingCollege of CharlestonMaymester 2010, Dr. Walker

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Studies are written by academic researchers and consultants, and accounting/consulting firms.

Studies are funded by government agencies, the casino industry, and other advocacy groups.

Cost-benefit studies - especially related to casino gambling - are cited by the media and used by lobbyists and policymakers.

Cost-benefit studies

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U.S. House of Representatives (1994/1995) National Gambling Impact Study Commission

(NGISC 1999) Australian Productivity Commission (APC

1999) National Opinion Research Center (NORC

1999) National Research Council’s Pathological

Gambling: A Critical Review (1999)

Examples of major studies

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The benefits of legalized casino gambling may include… casino tax revenues (avoidable by consumers) potential for economic growth labor market effects (higher employment and wages) benefits for consumers who like gambling

This is probably the most important and neglected benefit.

There have been relatively few academic studies of the benefits of gambling.

Economic benefits of casinos

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The social/economic costs associated with casino gambling are controversial in terms of definition and measurement

Most of the costs are caused by pathological gamblers.

Three perspectives on cost were represented at Whistler (2000) and Banff (2006) Cost of Illness (COI) Economic Public Health

Social costs of gambling

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Cost-of-illness (COI) Single (2003) and Single et al. (2003)

adapted for gambling from the alcohol/substance abuse literature

perhaps the best-developed methodology on costs but uses a problematic definition of “cost” (Markandya

and Pearce 1989)

Perspectives on cost

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Economic Collins and Lapsley (2003)

like Single, they use the Markandya and Pearce definition of social cost

Eadington (2003) Walker and Barnett (1999)

supplemented by Walker (2003, 2007) These three economic discussions are similar, but

there are some differences.

Perspectives on cost (cont.)

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Public health Korn and Shaffer (1999) and Korn, Gibbins, and

Azmier (2003) the most general of the three perspectives

Monetary measurement appears not to be a focus.

Perspectives on cost (cont.)

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Early study examples include… Maryland Task Force (1990) “Casinos in Florida” (1995) Goodman (1994), Legalized gambling as a strategy for

economic development Goodman (1995), The luck business, is similar

Grinols and Omorov (1996), Grinols (1994, 1995) Kindt (1994, 1995) Thompson, Gazel, and Rickman (1996, 1997, 1999)

Many are not peer-reviewed, or use arbitrary assumptions, or have been criticized in the literature.

Early cost studies

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Recent cost studies include… Thompson and Quinn (2000)

Study of South Carolina video poker machines Managerial and Decision Economics (2001)

Special issue edited by Grinols and Mustard Included papers by Gazel, Rickman, and Thompson

(2001), Grinols and Mustard (2001), and Kindt (2001) Comments on Kindt’s paper were published in MDE in

2004 by Eadington; Gerstein et al.; Levy; and Walker.

Recent cost studies

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Recent studies (cont) Thompson and Schwer (2003/2005)

Study of Las Vegas that got publicity Uses the methodology by Thompson et al. (1996)

Hall Aitken (2006) Study of U.K.

PolicyAnalytics (2006) Study of Indiana, with a focus on crime

Grinols and Mustard (2006) See the debate in Econ Journal Watch (2008)

Recent cost studies

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Why focus on costs?

Costs are typically the focus by media, politicians, and researchers. This may be a result of the existing illegal status of casinos:

“Are the benefits of legalization/expansion worth the costs?” Estimates of expected tax revenues, employment increases, and

changes in average wages can be easily produced. The social/economic costs are more elusive, both in defining them

and in measuring them.

Costs are closely related to prevalence of pathological gambling. For simplicity I’ll ignore different severities of problem

gambling as well as controversies over diagnosis and prevalence estimation.

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Calculating social costs

Most of cost studies use this formula:

estimated annual cost per pathological gambler X prevalence estimate (%) X population estimate

= estimated annual social cost of gambling

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Variation in cost estimates

Although no one who estimates monetary values of “social costs” defines the term, estimates have ranged from… $9,000 to over $50,000 per pathological gambler

per year. These estimates often include wealth transfers and

costs that are “internalized” by the actor. What is the motivation to produce monetary estimates?

Politicians want number on which to base decisions.

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Grinols (2004)

Grinols’ book Gambling in America has the potential to be very influential. His book would appear to be comprehensive and

unbiased to the reader unfamiliar with gambling research.

Like Kindt, Grinols ignores work with which he disagrees. See Eadington (2004) for a detailed discussion.

For a general discussion, see my book review in Southern Economic Journal, Jan. 2007.

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Grinols (2004)

Grinols estimates the social costs of casinos in the U.S. (p. 171) Estimates the annual cost to society of one

pathological gambler at $10,330. Cost per problem gambler is estimated at $2,945.

Grinols argues this is an underestimate of the true cost. On a “per adult” basis, the average cost is

estimated to be $219. (p. 175)

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Grinols (2004)

Grinols explains that his cost estimates were “derived by averaging over the available [“original”] studies for each category of social cost, adjusting to 2003 dollars, and summing over cost types” (p. 176).

The studies used by Grinols to derive his cost estimates include… 9 studies, none peer-reviewed.

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Studies used by Grinols

Politzer et al. (1981) later published in Journal of Gambling Behavior (1985) introduced the term, “abused dollars”

Thompson et al. (1996) later published in Gaming Law Review (1997)

Thompson and Quinn (1999/2000) unpublished

Thompson and Schwer (2003) later published in Journal of Public Budgeting,

Accounting and Financial Management (2005)

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Problems with Grinols’ Estimate Grinols’ estimate is careless and unreliable –

as policymakers may take it seriously. Most of the studies from which it is derived are

seriously flawed. Thompson et al. (1996, 1997), Politzer (1981),

and elements of Thompson and Schwer (2003) were examined by Walker and Barnett (1999) Other criticisms of the methodologies of these studies

have been made by the National Research Council (1999) and Federal Reserve Bank of Minneapolis (2003).

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Problems with Grinols’ Estimate

Grinols ignores the controversy over how to define and estimate social costs. His presentation gives the impression that because the

cited research is “original” it is legitimate. He does not explain differences in the studies or their

potential flaws. Examples of some of the problems in the studies…

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Politzer et al. (1985)

Politzer et al. (1985, p. 133) define “abused dollars”:

[the] amount [of money] obtained legally and/or illegally by the pathological gambler which otherwise would have been used by the pathological gambler, his family, or his victims for other essential purposes. These abused dollars include earned income put at risk in gambling, borrowed, and/or illegally obtained dollars spent on basic needs and/or provided to the family which otherwise would have been “covered” by that fraction of earned income which was used for gambling, and borrowed and/or illegally obtained dollars for the partial payment of gambling related debts.

This concept is too vague to be useful. What is an “essential

purpose”? Is it defined the same

for Bill Gates and Joe Sikzpak?

It could be interpreted to mean that the total amount of bets placed (handle) represents abused dollars. This amount would

often be much larger than the actual losses by a gambler.

Any money borrowed to gambler is considered “abused dollars.”

Use of this concept allows one to arrive at a very high social cost estimate, because the concept is so vague.

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Thompson et al. (1997)

Estimated social cost per compulsive gambler is $9,469 (p. 87), but… they do not define “social cost,” and simply

include whatever negative effects they can measure with their survey on Gamblers Anonymous (GA) members. Blaszczynski et al. (2006) indicate that survey

respondents may have difficulty in estimating their losses.

Using GA members in Las Vegas to estimate general cost per pathological is inappropriate.

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Thompson and Quinn (2000)

Count as costs money that leaves South Carolina for the purchase of video poker machines (millions of $ leave the state). If this was a legitimate conception of social cost,

then anytime anyone made any purchase it would represent a social cost.

“Cost” defined as money spent is not “bad” - it’s good. Consider a transaction at the grocery store.

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Thompson and Schwer (2003) They estimate the annual social cost of per

pathological gambler in Las Vegas at $19,085. Accounting for estimated prevalence and

population, the total annual cost estimate is between $301 and 470 million!

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Studies cited by Grinols (2004) Among the studies cited by Grinols, there

is… Disagreement about the types of costs to include

Sometimes costs are excluded because of measurement difficulties.

Disagreements on the estimated values of the individual cost categories For example…

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Definition of social costs

This must be defined before it’s measured There are two definitions that appear most

commonly in the literature Walker and Barnett (1999); Walker (2007, p. 88)

“A reduction in social real wealth. Implies that when benefits offset harms, there is no ‘social

cost’ Kaldor-Hicks criterion, that if the beneficiaries could

compensate the losers, and still have a net gain, then there’s no social cost

Using PPF-IC, it would mean moving under the PPF

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Other definitions

Grinols, Kindt, Thompson, etc., do not define social costs, but rather, simply discuss “externalities” in general The distinction between technological and

pecuniary externalities is important Markandya and Pearce (1989) appears to be

the most common definition chosen, when ‘social cost’ is defined in a study

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Markandya and Pearce (1989) For a cost to be “private” the actor must have full

knowledge about the potential costs of consuming the good.

For smoking (the subject of their paper), it implies that if the consumer is not “fully informed” about the harm of smoking, he underestimates the harms and chooses to smoke too much.

The result is a social cost, even if the cost is borne by the smoker himself.

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Markandya and Pearce (cont.)“To the extent that the costs are knowingly and

freely borne by the consumer or producer himself, they are referred to as PRIVATE COSTS but to the extent that they are not so borne but fall on the rest of society, they are referred to as SOCIAL COSTS. Hence, the total cost of any activity is the sum of the private and social costs.”

(p. 1139)

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Markandya and Pearce (cont.) “If his actions are determined by a perceived cost that is in fact less than his

actual cost, then the difference between the two can be viewed as a social cost.” (p. 1140)

Some costs have been ignored, and the smoker over-consumes This definition of social cost, whether applied to smoking or gambling, may

be biased toward overestimating costs Viscusi and Hakes (2008) find that people tend to overestimate potential

risks from smoking This suggests that they smoke less than is socially optimal

The Markandya and Pearce (1989) framework assumes that people will only under-estimate, and not over-estimate risks

All decisions are uncertain, to an extent No one perfectly estimates costs and benefits of an action

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Specific “cost” categories and estimates Again, there’s typically no discussion as to

whether a particular “cost” should be qualified as such.

See Walker (2007, p. 111), Table 6.4, which categorizes alleged “social costs” of gambling

Next, let’s consider a particular type of cost and see one example of how the estimate is derived. Again, these are used by Grinols (2004)

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Adjudication (Criminal and Civil Justice) Costs The monetary estimates for these costs among the

Grinols-cited studies are: $3,619 (Maryland, Politzer et al. 1981) $733 (Wisconsin, Thompson et al. 1996) $568 (Conn., Thompson et al. 1998) $31 (S. Dakota, 1999) $420 (Louisiana, Ryan et al. 1999) $266 (S. Carolina, Thompson and Quinn 2000) $51 (Nevada, Thompson and Schwer 2003)

It is difficult to believe that there could be such variation in costs across states. This is an indication that the definition or measurement of

costs varies across studies.

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Thompson and Schwer (2003) Use a survey of 99 Gamblers Anonymous (GA) members in Las Vegas Ask demographic data and about:

Volume of gambling activity Total lifetime gambling losses Sources of money used to gamble Gambling debt accrued Bankruptcy and other court proceedings to deal with creditors Theft or other illegal activities committed Convictions and jail time served Gambling’s effects on the job Government aid received Professional treatment received

However, the paper does not provide a copy of the survey questions. Blaszczynski et al. (2006) findings that survey respondents may not

accurately estimate gambling losses. Budgets are fungible, so it is difficult – if not impossible – to identify

specific sources of money used to gamble.

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One cost component of Thompson and Schwer (2003) To illustrate the arbitrary nature of social cost

estimates, in almost all of the studies cited in this presentation, let’s consider the calculation of one component of

the Thompson and Schwer (2003) cost estimate. I choose this study because the authors explain in

detail their calculation process.

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Thompson and Schwer (2003) estimate for “lost work time” cost 50 of 89 respondents (56%) indicated they had

missed work because of gambling. These reported an average of 17.22 hours missed during

each month due to gambling. The average loss is 9.67 hours/month allocated over the 89

respondents. This amounts to 116.1 hours per year.

Calculated [(50 x 17.22)/89] x 12 116.1 hours is multiplied by $15/hr, the hourly rate based

on Thompson et al.’s (1996) use of an average annual pay rate of $23,610. This results in an estimated cost of $1,742 for lost work time.

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Thompson and Schwer (2003), cont. The total estimated cost is $19,085 They multiply this cost by 43% because

Politzer et al. (1985) estimated the costs of gamblers not in treatment is only 43% as high as those in treatment. The result is an estimated cost of $8,207 per

pathological gambler. Eliminating transfers and internalized costs

reduces the $19,085 estimate to $2,049.

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Thompson and Schwer, cont.

The cost estimate ($8,207) is then multiplied by the population estimate and pathological prevalence rate range. Low pathological est. 1.8%, high est. 3.5% of

population $162.8 - $316.6 million

Cost estimate for problem gambler is $4,350 low prevalence rate est. 2.9%, high rate 3.2%

$139.0 – 153.4 million Total cost estimate: $301.8 – 470.0 million

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Summary

I’ve argued that most of the social cost studies are methodologically flawed. They do not define “social cost” or what they are

trying to measure. They do not defend (or explain) their

measurement methodology. The result is a wide range of social cost

estimates, from $9,000-13,000 up to $53,000. With such a wide range of estimates, should we

really be basing policy on these cost estimates?

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Research and Public Policy

Policymakers, the media, and voters rely on research to inform their opinions on gambling policy.

Cost-benefit analysis appear to be the most influential evidence used in policy deliberations.

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More General Problems

Regardless of the definition of “cost” chosen, or of the measurement process, there are other problems that may nullify cost-benefit analyses of gambling.

This does not mean these studies cannot provide useful information.

The motivation for research is interesting “Policy entrepreneurs” want to influence policy (Krugman

1996). Politicians rarely begin consideration with no opinion.

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Counterfactual scenario

For policy purposes, the economic and social effects of legalized gambling must be compared with the case in which gambling is not legal. This may be difficult to know in terms of employment,

economic growth, etc. unless the counterfactual is what already was happening. In some stagnant economies, one could argue, no other

industry would have come (Mississippi Gulf Coast?)

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Counterfactual scenario (cont) In terms of problem/pathological gambling…

If casinos were not legal in the state, would people just go to other venues?

If casinos were not available, would the pathological gamblers with coexisting disorders have more serious alcohol or drug problems? If yes, then it is possible that the gambling legalization would

lead to lower social costs even if more people become pathological gamblers. (I don’t know the extent to which this issue has been addressed in the

literature.)

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Comorbidity

This may be the biggest problem in cost-benefit analysis. Studies have found that many pathological gamblers have other

disorders. Petry, Stinson, and Grant (2005, p. 569) find:

74.2% have alcohol use disorders 38.1% have drug use disorders 41.3% have anxiety disorders 28.5% have obsessive-compulsive personality disorder

How do you allocate the “social costs” to the different problems when many pathological gamblers have other disorders?

Most of the published studies ignore this, resulting in overestimates of the social costs attributable to gambling.

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Surveys and fungible budgets Diagnostic instruments and cost estimate surveys ask various

questions about potential problem gamblers’ behavior. Blaszczynski et al. (2006) explain that without explicit

instructions, respondents use different strategies in estimating their gambling losses. The result may be serious biases in gambling losses reported in the

literature (p. 128). Walker (2007) discusses the inability to attribute specific

expenditures to specific revenue sources. Budgets are fungible.

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DSM-IV and SOGS criteria

DSM-IV items 8. “…has committed illegal acts such as forgery, fraud, theft,

or embezzlement to finance gambling.” If a person cannot estimate gambling losses, can they

correctly attribute their crimes to its cause? 10. “…relies on others to provide money to relieve a

desperate financial situation caused by gambling.” What if the person bought an expensive car, or is otherwise

financially irresponsible? How do clinicians deal with this possibility?

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DSM-IV and SOGS criteria (cont.) SOGS items

14. “Have you ever borrowed from someone and not paid them back as a result of your gambling?” What if you dine out at fine restaurants too often? Will you

attribute your financial problems to the proper cause? 16a-k. “If you borrowed money to gamble or pay gambling

debts, who or where did you borrow from?” (many possible responses) How can a person attribute specific spending to specific

sources of income, unless there is only one source of income?

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Caveat

As an economist, I know nothing about how diagnostic tools are used in practice.

Clinicians may argue that it does not matter whether or not it is possible to identify sources of spending.

Perhaps what matters is if the person thinks he/she has a problem.

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Caveat (cont.)

However, the Blaszczynski (2006) paper would suggest that the fungible budget issue might be a real one.

Even if these issues are problematic, it does not mean that the instruments do not serve their purpose effectively.

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Relevance of Diagnostic Tools to Cost Estimates

The reason these types of questions are relevant to policy is that the questions about total losses and sources of money used to gamble are used in cost estimation studies. “Abused dollars” “Bad debts” “Bailout costs” “Bankruptcy costs”

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“Fiscal externalities”

Browning (1999) discusses how to handle costs of government policies. His application is to health care costs associated

with smoking. Walker (2007) discusses this in the context of

treatment for pathological gambling.

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“Fiscal externalities” (cont.)

The issue is how to classify costs of government for pathological gambling behavior. Is the monetary cost incurred by government a cost of

pathological gambling, or a cost of our philosophy on government and policy?

Suppose one country has very generous treatment reimbursement (150%), while another country’s government pays only 50% of the costs. The “social cost” of the first country would be triple that of the

second. A better way to deal with these costs must be developed.

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“Fiscal externalities” (cont.)

If government expenditures are “social costs,” then we can eliminate costs by eliminating spending.

Obviously this isn’t the correct way to think about social costs.

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Critiques of C-B Analyses

There have been a variety of critiques of C-B studies in the substance/alcohol abuse literature.

Reuter (1999) and Kleiman (1999) are enlightening. They argue that research effort would be better spent on the

effects of policy changes. Applied to gambling, since gambling is already widely

available, what can we do to minimize the costs. This is similar to what public health perspectives advocate –

harm minimization.

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Critiques (cont.)

Reuter (1999, p. 638) suggests that a C-B study may represent an… “enormously helpful compendium of a wide range

of estimates of various components of something that might be called cost, [it] is an unsatisfactory answer to a question of dubious importance.”

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Should We Try to Measure Costs and Benefits of Legalized Gambling?

Do cost-benefit studies provide important information? (And are they important?) Politicians, media, and voters are often influenced

by them. Peter Collins’ book, Gambling and the public

interest (2003) has an excellent discussion on this issue.

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Should We Try to Measure Costs and Benefits of Legalized Gambling? (cont.) Policy discussions neglect the fundamental

issues… Property rights Freedom of choice/consumer sovereignty The role of government in a free society

We instead focus on expected tax benefits compared to a murky understanding of “social costs.”

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Research and Policy

Research does have a place informing policy decisions. Collins (2003, p. 27) explains,

“Whether gambling should be legal is a question …the answer to which requires a combination of normative and empirical judgments. This means that the answer we give will depend in part on the political principles and social ideals to which we subscribe, as well as on what we think as a matter of fact will be the likely consequences of adopting one policy rather than another.

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Research and policy (cont.)

Unfortunately, researchers have not developed valid or practical methods for estimating costs (and benefits).

Given that some researchers seem intent on influencing policy (Eadington 2004), perhaps we should focus on the more basic issues of property rights, freedom of choice, and the proper role of government.

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Conclusion

Although a variety of social cost estimates have been produced, they are of limited value

Perhaps it would be more effective to identify the types of impacts of problem gambling behaviors These could be quantified “Cost estimates” should be avoided

This is unlikely to happen since politicians and voters like concise summary data Consider Grinols’ 3:1 cost:benefit ratio, commonly

cited